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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2005
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No.: 000-50066
 HARRINGTON WEST FINANCIAL GROUP, INC.
 
  Delaware
    
    48-1175170(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)610 Alamo Pintado RoadSolvang, California
    
    93463(Address of Principal
    
    (Zip Code)Executive Offices)
       
 o þ
 o þ
  þ o
 þ
  o o þ
  o þ




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##### Table of Contents



TABLE OF CONTENTS
 PagePART IItem 1. BusinessGeneral
    
    
    2Principal Products and ServicesLending Activities
    
    
    3Asset Quality
    
    
    10Investment Activities
    
    
    17Sources of Funds
    
    
    25Subsidiaries
    
    
    29Employees
    
    
    29Regulation of Harrington West Financial Group
    
    
    29Regulation of Los Padres Bank
    
    
    30Recent Legislation
    
    
    36Regulation of Non-banking Affiliates
    
    
    37Item 1A. Risk Factors
    
    
    37Item 1B. Unresolved Staff Comments
    
    
    46Item 2. Properties
    
    
    46Item 3. Legal Proceedings
    
    
    48Item 4. Submission of Matters to a Vote of Security Holders
    
    
    48PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    49Item 6. Selected Financial Data
    
    
    51Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsMission
    
    
    52Multiple Market Strategy
    
    
    52Product Line Diversification
    
    
    53Modern Financial Skills
    
    
    53Control Banking Risks
    
    
    54Performance Measurement
    
    
    54Profitability Drivers
    
    
    54Critical Accounting Policies
    
    
    59Results of Operation
    
    
    60Changes in Financial Condition
    
    
    67Asset and Liability Management
    
    
    69Liquidity and Capital Resources
    
    
    73Contractual Obligations and Commercial Commitments
    
    
    76Off Balance Sheet Arrangements
    
    
    76Inflation and Changing Prices
    
    
    78Recent Accounting Pronouncements
    
    
    78Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    79Item 8. Financial Statements and Supplementary Data
    
    
    80Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    128Item 9A. Controls and Procedures
    
    
    128Item 9B. Other Information
    
    
    128PART IIIItem 10. Directors and Executive Officer of the Registrant
    
    
    128Item 11. Executive Compensation
    
    
    128Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    129Item 13. Certain Relationships and Related Transactions
    
    
    129Item 14. Principal Accountant Fees and Services
    
    
    129PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    130SIGNATURES
    
    
    132CERTIFICATIONS
    
    
    133Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32




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PART I
 Cautionary Statement Regarding Forward-Looking Statements.
  
    
    we may experience higher defaults on our loan portfolio than we expect;
    
    changes in managements estimate of the adequacy of the allowance for loan losses;
    
    changes in managements valuation of our mortgage-backed and related securities
portfolio and interest rate contracts;
    
    increases in competitive pressure among financial institutions;
    
    general economic conditions, either nationally or locally in areas in which we
conduct or will conduct our operations, or conditions in financial markets may be less
favorable than we currently anticipate;
    
    our net income from operations may be lower than we expect;
    
    natural disasters;
    
    we may lose more business or customers than we expect, or our operating costs may be
higher than we expect;
    
    the availability of capital to fund our growth and expansion;
    
    changes in the interest rate environment and their impact on customer behavior and
our interest margins;
    
    political and global changes arising from the war on terrorism;
    
    the impact of repricing and competitors pricing initiatives on loan and deposit products;
    
    our ability to adapt successfully to technological changes to meet customers needs
and developments in the market place;
    
    our ability to access cost-effective funding;
    
    our ability to successfully complete our strategy to continue to grow our business
in California, Kansas and Arizona;
    
    our returns from our securities portfolio may be lower than we expect;
 1




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
    
    legislative or regulatory changes or changes in accounting principles, policies or
guidelines may adversely affect our ability to conduct our business.
   
 Item 1. Business.
 
 General
     2




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Lending Activities
 General
 3




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December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real estate loans:Single-family
    
    $
    115,925
    
    
    
    17.0
    %
    
    $
    100,485
    
    
    
    16.6
    %
    
    $
    93,725
    
    
    
    17.9
    %
    
    $
    116,714
    
    
    
    25.8
    %
    
    $
    156,150
    
    
    
    34.5
    %Multi-family
    
    
    80,855
    
    
    
    11.9
    
    
    
    84,937
    
    
    
    14.0
    
    
    
    82,090
    
    
    
    15.7
    
    
    
    71,856
    
    
    
    15.9
    
    
    
    69,584
    
    
    
    15.4Commercial
    
    
    253,208
    
    
    
    37.2
    
    
    
    260,759
    
    
    
    43.1
    
    
    
    234,606
    
    
    
    44.8
    
    
    
    183,264
    
    
    
    40.5
    
    
    
    156,431
    
    
    
    34.5Construction (1)
    
    
    70,883
    
    
    
    10.4
    
    
    
    34,981
    
    
    
    5.8
    
    
    
    30,835
    
    
    
    5.9
    
    
    
    19,666
    
    
    
    4.4
    
    
    
    20,235
    
    
    
    4.5Land acquisition and development
    
    
    36,085
    
    
    
    5.3
    
    
    
    27,460
    
    
    
    4.5
    
    
    
    8,312
    
    
    
    1.6
    
    
    
    14,948
    
    
    
    3.3
    
    
    
    7,889
    
    
    
    1.7Commercial and industrial loans
    
    
    96,566
    
    
    
    14.2
    
    
    
    72,240
    
    
    
    11.9
    
    
    
    56,942
    
    
    
    10.8
    
    
    
    27,676
    
    
    
    6.1
    
    
    
    30,838
    
    
    
    6.8Consumer loans
    
    
    26,653
    
    
    
    3.9
    
    
    
    23,757
    
    
    
    3.9
    
    
    
    16,613
    
    
    
    3.1
    
    
    
    17,565
    
    
    
    3.9
    
    
    
    11,107
    
    
    
    2.5Other loans (2)
    
    
    1,271
    
    
    
    0.1
    
    
    
    1,044
    
    
    
    0.2
    
    
    
    1,035
    
    
    
    0.2
    
    
    
    503
    
    
    
    0.1
    
    
    
    539
    
    
    
    0.1Total loans receivable
    
    
    681,446
    
    
    
    100.0
    %
    
    
    605,663
    
    
    
    100.0
    %
    
    
    524,158
    
    
    
    100.0
    %
    
    
    452,192
    
    
    
    100.0
    %
    
    
    452,773
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    (5,661
    )
    
    
    
    
    
    
    (5,228
    )
    
    
    
    
    
    
    (4,587
    )
    
    
    
    
    
    
    (3,797
    )
    
    
    
    
    
    
    (3,736
    )Net deferred loan fees
    
    
    (2,498
    )
    
    
    
    
    
    
    (1,730
    )
    
    
    
    
    
    
    (1,394
    )
    
    
    
    
    
    
    (1,332
    )
    
    
    
    
    
    
    (1,102
    )Net (discounts) premiums
    
    
    (397
    )
    
    
    
    
    
    
    (263
    )
    
    
    
    
    
    
    319
    
    
    
    
    
    
    
    987
    
    
    
    
    
    
    
    1,774(8,556
    )
    
    
    
    
    
    
    (7,221
    )
    
    
    
    
    
    
    (5,662
    )
    
    
    
    
    
    
    (4,142
    )
    
    
    
    
    
    
    (3,064
    )Loans receivable, net
    
    $
    672,890
    
    
    
    
    
    
    $
    598,442
    
    
    
    
    
    
    $
    518,496
    
    
    
    
    
    
    $
    448,050
    
    
    
    
    
    
    $
    449,709
 
 (1)
    
    Includes loans secured by residential and commercial properties. At December 31, 2005, we
had $50.6 million of construction loans secured by residential properties,$3.7 million of land
and development and $16.6 million of construction loans secured by commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans. 4




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Due 1-5
    
    
    Due 5 or more yearsDue 1 year
    
    
    years after
    
    
    afteror less
    
    
    December 31, 2005
    
    
    December 31, 2005
    
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    1,900
    
    
    $
    8,422
    
    
    $
    105,603
    
    
    $
    115,925Multi-family residential
    
    
    2,845
    
    
    
    16,723
    
    
    
    61,287
    
    
    
    80,855Commercial
    
    
    14,070
    
    
    
    122,024
    
    
    
    117,114
    
    
    
    253,208Construction (1)
    
    
    26,530
    
    
    
    16,170
    
    
    
    28,183
    
    
    
    70,883Land acquisition and development
    
    
    17,511
    
    
    
    14,864
    
    
    
    3,710
    
    
    
    36,085Commercial and industrial loans
    
    
    47,885
    
    
    
    41,853
    
    
    
    6,828
    
    
    
    96,566Consumer loans
    
    
    17
    
    
    
    775
    
    
    
    25,861
    
    
    
    26,653Other loans (2)
    
    
    1,271
    
    
    
    
    
    
    
    
    
    
    
    1,271Total
    
    $
    112,029
    
    
    $
    220,831
    
    
    $
    348,586
    
    
    $
    681,446
 
 (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans.  5




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Floating oradjustable-Fixed rate
    
    
    rate
    
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    57,720
    
    
    $
    56,306
    
    
    $
    114,026Multi-family residential
    
    
    49,858
    
    
    
    28,152
    
    
    
    78,010Commercial
    
    
    147,709
    
    
    
    91,429
    
    
    
    239,138Construction (1)
    
    
    9,470
    
    
    
    34,883
    
    
    
    44,353Land acquisition and development
    
    
    1,003
    
    
    
    17,571
    
    
    
    18,574Commercial and industrial loans
    
    
    27,166
    
    
    
    21,514
    
    
    
    48,680Consumer loans(2)
    
    
    305
    
    
    
    26,331
    
    
    
    26,636Total
    
    $
    293,231
    
    
    $
    276,186
    
    
    $
    569,417
 
 (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer lines of credit loans. Origination, Purchase and Sale of Loans.
   6




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Single-Family Residential Real Estate Loans.
  Multi-Family Residential and Commercial Real Estate Loans.
  7




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Construction Loans.
   8




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Land acquisition and development.
 Commercial and Industrial Loans
  Consumer and Other Loans
  9




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Asset Quality
 General
 Loan Delinquencies
 Non-Performing Assets
 10




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At December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in Thousands)Non-accruing loans:Single-family residential
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    218
    
    
    $
    56Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    348Land acquisition and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    
    
    
    
    95
    
    
    
    8
    
    
    
    
    
    
    
    93Consumer and other
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Total non-accruing loans
    
    
    
    
    
    
    95
    
    
    
    12
    
    
    
    218
    
    
    
    497Total non-performing loans
    
    
    
    
    
    
    95
    
    
    
    12
    
    
    
    218
    
    
    
    497Troubled debt restructurings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate owned, net of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets and
troubled debt restructurings
    
    $
    
    
    
    $
    95
    
    
    $
    12
    
    
    $
    218
    
    
    $
    497Total non-performing loans
and troubled debt
restructurings as a
percentage of total loans
    
    
    0.00
    %
    
    
    0.02
    %
    
    
    0.00
    %
    
    
    0.05
    %
    
    
    0.11
    %Total non-performing assets
and troubled debt
restructurings as a
percentage of total assets
    
    
    0.00
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %
    
    
    0.07
    %
   Classified Assets
 11




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Allowance for Loan Losses.
 Allocated allowance for specifically identified problem loans Accounting by Creditors for
Impairment of a Loan.
 Formula allowance for non-homogenous loans
  Formula allowance for large groups of smaller balance homogenous loans
 Unallocated Allowance
 12




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
    
    trends in criticized and non-accrual assets;
    
    the levels and trends in charge-offs, recovery history and loan restructuring;
    
    changes in volumes and terms of the loan portfolio;
    
    changes in the effectiveness of the internal asset review process;
    
    changes in lending policies, procedures and practices;
    
    changes in the experience, ability and depth of lending management;
    
    changes in the national and local economic conditions; and
    
    the trend in local real estate values.
    13




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At December 31,2005
    
    
2004

    
    
    2003(In Thousands)Specific reserve
    
    $
    
    
    
    $
    
    
    
    $
    50Formula-non homogenous
    
    
    5,053
    
    
    
    4,477
    
    
    
    3,974Formula-homogenous
    
    
    605
    
    
    
    570
    
    
    
    474Unallocated
    
    
    3
    
    
    
    181
    
    
    
    89$
    5,661
    
    
    $
    5,228
    
    
    $
    4,587
    14




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At and For the Year EndedDecember 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in Thousands)Balance at beginning of period
    
    $
    5,228
    
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736
    
    
    $
    3,150Charge-offs:Real estate loansSingle-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    Consumer and other loans
    
    
    (2
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Total charge-offs
    
    
    (2
    )
    
    
    (9
    )
    
    
    
    
    
    
    (330
    )
    
    
    (15
    )Recoveries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    (2
    )
    
    
    (9
    )
    
    
    
    
    
    
    (330
    )
    
    
    (15
    )Allowance for loan losses acquired
in connection with branch
purchase (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Provision (credit) for losses on loans
    
    
    435
    
    
    
    650
    
    
    
    790
    
    
    
    391
    
    
    
    1Balance at end of period
    
    $
    5,661
    
    
    $
    5,228
    
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736Allowance for loan losses as a percent of
total net loans outstanding at the end of
the period
    
    
    0.84
    %
    
    
    0.87
    %
    
    
    0.88
    %
    
    
    0.83
    %
    
    
    0.83
    %Ratio of net charge-offs to average loans
outstanding during the period
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    0.07
    %
    
    
    
    %
 
 (1)
    
    In November 2001, we acquired from Harrington Bank, FSB the Shawnee Mission, Kansas
branch, along with related loans and deposits. 15




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December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachCategory to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in Thousands)Real estate loans:Single-family residential
    
    $
    265
    
    
    
    17.0
    %
    
    $
    265
    
    
    
    16.6
    %
    
    $
    308
    
    
    
    17.9
    %
    
    $
    390
    
    
    
    25.8
    %
    
    $
    509
    
    
    
    34.5
    %Multi-family residential
    
    
    422
    
    
    
    11.9
    
    
    
    554
    
    
    
    14.0
    
    
    
    416
    
    
    
    15.7
    
    
    
    344
    
    
    
    15.9
    
    
    
    437
    
    
    
    15.4Commercial
    
    
    1,115
    
    
    
    37.2
    
    
    
    1,072
    
    
    
    43.1
    
    
    
    1,400
    
    
    
    44.8
    
    
    
    773
    
    
    
    40.5
    
    
    
    693
    
    
    
    34.4Construction
    
    
    300
    
    
    
    10.4
    
    
    
    564
    
    
    
    5.8
    
    
    
    419
    
    
    
    5.9
    
    
    
    546
    
    
    
    4.4
    
    
    
    612
    
    
    
    4.6Land acquisition and development
    
    
    272
    
    
    
    5.3
    
    
    
    211
    
    
    
    4.5
    
    
    
    123
    
    
    
    1.6
    
    
    
    215
    
    
    
    3.3
    
    
    
    79
    
    
    
    1.7Commercial and industrial loans
    
    
    2,944
    
    
    
    14.2
    
    
    
    2,076
    
    
    
    11.9
    
    
    
    1,616
    
    
    
    10.8
    
    
    
    1,253
    
    
    
    6.1
    
    
    
    1,172
    
    
    
    6.8Consumer and other loans
    
    
    340
    
    
    
    3.9
    
    
    
    305
    
    
    
    4.1
    
    
    
    216
    
    
    
    3.1
    
    
    
    149
    
    
    
    3.9
    
    
    
    63
    
    
    
    2.6Unallocated reserve
    
    
    3
    
    
    
    .1
    
    
    
    181
    
    
    
    
    
    
    
    89
    
    
    
    .2
    
    
    
    127
    
    
    
    .1
    
    
    
    171
    
    
    
    Total
    
    $
    5,661
    
    
    
    100
    %
    
    $
    5,228
    
    
    
    100
    %
    
    $
    4,587
    
    
    
    100
    %
    
    $
    3,797
    
    
    
    100
    %
    
    $
    3,736
    
    
    
    100.0
    %
 16




---



##### Table of Contents



Investment Activities
 General
  e.g Accounting for Certain Investments in Debt and Equity Securities,
 17




---



##### Table of Contents



Mortgage-Backed and Related Securities
  i.e
    18




---



##### Table of Contents



Corporate Debt Securities.
 Trading Account Assets and Other Securities
 19




---



##### Table of Contents



20




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    
    
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Fair Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in thousands)Mortgage-backed securities
pass throughsDue from one to five years
    
    $
    1,674
    
    
    $
    1,634
    
    
    
    5.39
    %
    
    $
    1,453
    
    
    $
    1,463
    
    
    
    5.71
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %Due from five to ten years
    
    
    3,617
    
    
    
    3,638
    
    
    
    5.89
    
    
    
    1,995
    
    
    
    2,013
    
    
    
    5.35
    
    
    
    4,174
    
    
    
    4,349
    
    
    
    6.74Due over ten years
    
    
    119,862
    
    
    
    117,568
    
    
    
    4.15
    
    
    
    110,917
    
    
    
    110,226
    
    
    
    3.65
    
    
    
    125,592
    
    
    
    126,025
    
    
    
    4.68Total mortgage backed
securities -
pass-throughs (1)
    
    
    125,153
    
    
    
    122,840
    
    
    
    4.22
    
    
    
    114,365
    
    
    
    113,702
    
    
    
    3.70
    
    
    
    129,766
    
    
    
    130,374
    
    
    
    4.74Collateralized mortgage
obligationsDue over ten years
    
    
    80,470
    
    
    
    79,531
    
    
    
    4.21
    
    
    
    73,894
    
    
    
    73,399
    
    
    
    3.31
    
    
    
    48,704
    
    
    
    48,581
    
    
    
    3.36Total collateralized
mortgage obligations
    
    
    80,470
    
    
    
    79,531
    
    
    
    4.21
    
    
    
    73,894
    
    
    
    73,399
    
    
    
    3.31
    
    
    
    48,704
    
    
    
    48,581
    
    
    
    3.36Commercial mortgage-backed
securitiesDue from one to five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,269
    
    
    
    18,597
    
    
    
    5.81
    
    
    
    28,717
    
    
    
    29,489
    
    
    
    2.55Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due over ten years
    
    
    40,647
    
    
    
    40,179
    
    
    
    3.63
    
    
    
    29,276
    
    
    
    29,324
    
    
    
    3.63
    
    
    
    31,210
    
    
    
    31,427
    
    
    
    3.72Total commercial
mortgage-back securities
    
    
    40,647
    
    
    
    40,179
    
    
    
    3.63
    
    
    
    47,545
    
    
    
    47,921
    
    
    
    4.47
    
    
    
    59,927
    
    
    
    60,916
    
    
    
    3.16Asset-backed securities
(underlying
securities mortgages)Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,913
    
    
    
    4,961
    
    
    
    2.87Due over ten years
    
    
    141,086
    
    
    
    141,564
    
    
    
    5.40
    
    
    
    187,949
    
    
    
    189,389
    
    
    
    3.63
    
    
    
    151,908
    
    
    
    152,291
    
    
    
    2.67Total asset backed-securities
    
    
    141,086
    
    
    
    141,564
    
    
    
    5.40
    
    
    
    187,949
    
    
    
    189,389
    
    
    
    3.63
    
    
    
    157,821
    
    
    
    157,252
    
    
    
    2.68Asset-backed securitiesDue from five to ten years
    
    
    3,335
    
    
    
    3,238
    
    
    
    7.17
    
    
    
    5,460
    
    
    
    5,143
    
    
    
    5.13Total asset backed securities
    
    
    3,335
    
    
    
    3,238
    
    
    
    7.17
    
    
    
    5,460
    
    
    
    5,143
    
    
    
    5.13Corporate debt securitiesDue over ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    1,652
    
    
    
    15.88
    
    
    
    1,489
    
    
    
    1,568
    
    
    
    15.88Total corporate debt
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    1,652
    
    
    
    15.88
    
    
    
    1,489
    
    
    
    1,568
    
    
    
    15.88Total
    
    $
    390,691
    
    
    $
    387,352
    
    
    
    4.61
    
    
    $
    430,782
    
    
    $
    431,206
    
    
    
    4.18
    
    
    $
    397,707
    
    
    $
    398,691
    
    
    
    3.56
 
 (1)
    
    The fair value at December 31, 2005, consisted of $34.0 million of Fannie Mae participation
certificates, $18.6 million of Freddie Mac participation certificates and $70.2 million of
Ginnie Mae participation certificates. At December 31, 2004, the portfolio consisted of
$16.6 million of Fannie Mae participation certificates, $22.5 million of Freddie Mac
participation certificates and $74.6 million of Ginnie Mae participation certificates. At
December 31, 2003, the portfolio consisted of $26.4 million of Fannie Mae participation
certificates, $10.2 million of Freddie Mac participation certificates and $93.8 million of
Ginnie Mae participation certificates. 21




---



##### Table of Contents



December 31,2005

    
    
    2004
    
    

    2003Weighted

    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities:Due from five to ten years
    
    $
    77
    
    
    $
    80
    
    
    
    7.55
    %
    
    $
    90
    
    
    $
    96
    
    
    
    7.56
    %Due over ten years
    
    
    3
    
    
    
    4
    
    
    
    7.48
    
    
    
    3
    
    
    
    3
    
    
    
    7.48
    
    
    $
    222
    
    
    $
    240
    
    
    
    6.99
    %Total mortgage-backed
securities (1)
    
    
    80
    
    
    
    84
    
    
    
    7.54
    
    
    
    93
    
    
    
    99
    
    
    
    7.55
    
    
    
    222
    
    
    
    240
    
    
    
    6.99Total securities classified
as held
to maturity
    
    $
    80
    
    
    $
    84
    
    
    
    7.54
    
    
    $
    93
    
    
    $
    99
    
    
    
    7.55
    
    
    $
    222
    
    
    $
    240
    
    
    
    6.99
 
 (1)
    
    The fair value at December 31, 2005, 2004, and 2003 consisted of $84,000, $99,000 and
$240,000, respectively of Fannie Mae participation certificates. 22




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    
    
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Fair Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities
    
    $
    324
    
    
    $
    323
    
    
    
    4.32
    %
    
    $
    383
    
    
    $
    388
    
    
    
    3.91
    %
    
    $
    1,447
    
    
    $
    1,495
    
    
    
    5.90
    %Mutual funds
    
    
    522
    
    
    
    524
    
    
    
    
    
    
    
    560
    
    
    
    581
    
    
    
    
    
    
    
    441
    
    
    
    450
    
    
    
    Other securities (1)
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    166
    
    
    
    Total trading account assets
    
    $
    846
    
    
    $
    975
    
    
    
    1.65
    
    
    $
    943
    
    
    $
    1,046
    
    
    
    1.59
    
    
    $
    1,888
    
    
    $
    2,111
    
    
    
    4.52
 
 (1)
    
    The balance at December 31, 2005, 2004 and 2003 consisted of total return swaps, which we
use to enhance our returns, and interest rate contracts, which do not qualify for hedge
accounting treatment pursuant to SFAS No. 133 . 23




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##### Table of Contents



At or For the YearsEnded December 31,2005
    
    
    2004
    
    
    2003(In Thousands)Beginning balance
    
    $
    431,305
    
    
    $
    398,931
    
    
    $
    326,997Mortgagebacked
securities pass-throughs purchased  available for sale
    
    
    48,663
    
    
    
    43,238
    
    
    
    45,611Collateralized
mortgage obligations purchased
available for sale
    
    
    27,180
    
    
    
    47,165
    
    
    
    55,077Commercial mortgage-backed securities purchased  available for sale
    
    
    
    
    
    
    62
    
    
    
    9,561Asset-backed
securities purchased available for sale
    
    
    31,838
    
    
    
    64,064
    
    
    
    144,674Corporate
debt securities purchased available for sale
    
    
    
    
    
    
    
    
    
    
    604Total securities purchased
    
    
    107,681
    
    
    
    154,529
    
    
    
    255,527Less:Sale and principal payments of mortgage-backed securities,
pass throughs  available for sale
    
    
    (36,694
    )
    
    
    (56,943
    )
    
    
    (76,148
    )Sale and principal payments of collateralized mortgage
obligations  available for sale
    
    
    (20,523
    )
    
    
    (22,073
    )
    
    
    (76,492
    )Sale and principal payments of commercial
mortgage-backed securities  available for sale
    
    
    (5,619
    )
    
    
    (10,982
    )
    
    
    (13,662
    )Sale and principal payments of asset-backed securities
 available for sale
    
    
    (81,651
    )
    
    
    (29,797
    )
    
    
    (10,814
    )Principal payments of mortgage-backed securities, pass
throughs  held to maturity
    
    
    (13
    )
    
    
    (129
    )
    
    
    (133
    )Sale and principal payments of corporate bonds,
available for sale
    
    
    (1,778
    )
    
    
    
    
    
    
    Total securities sold
    
    
    (146,278
    )
    
    
    (119,924
    )
    
    
    (177,249
    )Proceeds from maturities of securities
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Change in net unrealized gain (loss) on
securities available for sale and held to maturity
    
    
    (2,832
    )
    
    
    353
    
    
    
    (286
    )Amortization of (premium)/discount
    
    
    (2,440
    )
    
    
    (2,584
    )
    
    
    (4,058
    )Ending balance
    
    $
    387,436
    
    
    $
    431,305
    
    
    $
    398,931
 24




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##### Table of Contents



Sources of Funds
 General
 Deposits
   Amount(In Thousands)Certificates of deposit maturing:Three months or less
    
    $
    54,952Over three through six months
    
    
    79,313Over six through twelve months
    
    
    95,532Over twelve months
    
    
    14,671Total
    
    $
    244,468
 25




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003(In Thousands)Beginning balance
    
    $
    598,182
    
    
    $
    570,697
    
    
    $
    525,271Net increase (decrease) before interest credited
    
    
    13,862
    
    
    
    18,121
    
    
    
    36,362Interest credited
    
    
    14,294
    
    
    
    9,383
    
    
    
    9,387Deposit acquisitions
    
    
    42,870Amortization of purchase accounting premium
    
    
    (63
    )
    
    
    (19
    )
    
    
    (323
    )Net increase (decrease) in deposits
    
    
    70,963
    
    
    
    27,485
    
    
    
    45,426Ending balance
    
    
    669,145
    
    
    
    598,182
    
    
    
    570,697
  At December 31,2005
    
    
    2004
    
    
    2003(In Thousands)0.00% to 2.99%
    
    $
    65,041
    
    
    $
    366,685
    
    
    $
    334,8733.00% to 3.99%
    
    
    301,287
    
    
    
    18,389
    
    
    
    12,5764.00% to 4.99%
    
    
    109,300
    
    
    
    29,983
    
    
    
    27,5415.00% to 5.99%
    
    
    6,584
    
    
    
    6,940
    
    
    
    14,3146.00% to 6.99%
    
    
    
    
    
    
    1,158
    
    
    
    4,0277.00% and higher
    
    
    
    
    
    
    887
    
    
    
    1,137Total
    
    $
    482,212
    
    
    $
    424,042
    
    
    $
    394,468
  Over SixMonths
    
    
    Over One
    
    
    Over TwoSix Months
    
    
    Through One
    
    
    Year Through
    
    
    Years Through
    
    
    Over Threeand Less
    
    
    Year
    
    
    Two Years
    
    
    Three Years
    
    
    Years
    
    
    Total(In Thousands)0.00% to 2.99%
    
    $
    56,536
    
    
    $
    6,408
    
    
    $
    1,872
    
    
    $
    225
    
    
    $
    
    
    
    $
    65,0413.00% to 3.99%
    
    
    172,890
    
    
    
    113,028
    
    
    
    6,604
    
    
    
    4,651
    
    
    
    4,114
    
    
    
    301,2874.00% to 4.99%
    
    
    33,151
    
    
    
    65,497
    
    
    
    2,948
    
    
    
    1,495
    
    
    
    6,209
    
    
    
    109,3005.00% to 5.99%
    
    
    1,428
    
    
    
    1,167
    
    
    
    3,838
    
    
    
    
    
    
    
    151
    
    
    
    6,5846.00% to 6.99%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.00% and higher
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    264,005
    
    
    $
    186,100
    
    
    $
    15,262
    
    
    $
    6,371
    
    
    $
    10,474
    
    
    $
    482,212
 26




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##### Table of Contents



Borrowings.
    27




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##### Table of Contents



At or For the Year EndedDecember 31,2005
    
    2004
    
    2003(Dollars in Thousands)Securities sold under agreements to repurchase:Average balance outstanding
    
    $
    10,853
    
    
    $
    20,749
    
    
    $
    919Maximum amount outstanding at any month-end
during the period
    
    
    22,298
    
    
    
    21,245
    
    
    
    1,157Balance outstanding at end of period
    
    
    13
    
    
    
    20,689
    
    
    
    728Average interest rate during the period
    
    
    1.49
    %
    
    
    1.47
    %
    
    
    .74
    %Average interest rate at end of period
    
    
    1.05
    %
    
    
    1.48
    %
    
    
    .63
    %Short-term FHLB advances:Average balance outstanding
    
    $
    295,116
    
    
    $
    263,898
    
    
    $
    190,392Maximum amount outstanding at any month-end
during the period
    
    
    339,050
    
    
    
    298,000
    
    
    
    242,500Balance outstanding at end of period
    
    
    300,000
    
    
    
    297,000
    
    
    
    242,500Average interest rate during the period
    
    
    3.26
    %
    
    
    1.46
    %
    
    
    1.22
    %Average interest rate at end of period
    
    
    4.03
    %
    
    
    2.22
    %
    
    
    .96
    %
 28




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##### Table of Contents



Subsidiaries
       
 Employees
  
 Regulation of Harrington West Financial Group, Inc.
 General
 29




---



##### Table of Contents



Activities Restriction Test
 Restrictions on Acquisitions
  
 Regulation of Los Padres Bank
 General
   30




---



##### Table of Contents



Insurance of Deposit Accounts
 
    
    has engaged in unsafe or unsound practices;
    
    is in an unsafe or unsound condition to continue operations; or
    
    has violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the OTS.
   Regulatory Capital Requirements and Prompt Corrective Action
  31




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##### Table of Contents




    
    tangible capital equal to at least 1.5% of total adjusted assets,
    
    leverage capital (core capital) equal to 4% of total adjusted assets, and
    
    risk-based capital equal to 8% of total risk-weighted assets.
  32




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##### Table of Contents



Tier 1 LeverageTangible Capital(1)
    
    
    Capital(1)
    
    
    Risk-Based Capital(1)Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Actual regulatory capital
    
    $
    76,933
    
    
    
    6.78
    %
    
    $
    76,933
    
    
    
    6.78
    %
    
    $
    82,594
    
    
    
    10.69
    %Minimum regulatory capital
    
    
    17,010
    
    
    
    1.50
    
    
    
    45,361
    
    
    
    4.00
    
    
    
    61,784
    
    
    
    8.00Excess regulatory capital
    
    $
    59,923
    
    
    
    5.28
    %
    
    $
    31,572
    
    
    
    2.78
    %
    
    $
    20,810
    
    
    
    2.69
    %
 
 (1)
    
    Tangible capital is computed as a percentage of tangible assets and Tier 1 leverage
capital is computed as a percentage of the adjusted total assets, both of which amounted to
$76.9 million as of December 31, 2005.  Loans-to-One Borrower Limitations
 
    
    the purchase price of each single-family dwelling in the development does not exceed
$500,000;
    
    the savings association is in compliance with its capital requirements;
    
    the loans comply with applicable loan-to-value requirements; and
    
    the aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus.
  Qualified Thrift Lender Test
 33




---



##### Table of Contents



Affiliate Transactions
 Capital Distribution Limitations
 
    
    be required to file an application and await approval from the OTS before it makes a
capital distribution;
    
    be required to file a notice 30 days before the capital distribution; or
    
    be permitted to make the capital distribution without notice or application to the OTS.
  
    
    it is not eligible for expedited treatment of its other applications under OTS regulations;
    
    the total amount of all of capital distributions, including the proposed capital
distribution, for the applicable calendar year exceeds its net income for that year to
date plus retained net income for the preceding two years;
    
    it would not be at least adequately capitalized, under the prompt corrective action
regulations of the OTS following the distribution; or
    
    the associations proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement between the savings
association and the OTS, or the FDIC, or violate a condition imposed on the savings
association in an OTS-approved application or notice.
  
    
    would not be well capitalized under the prompt corrective action regulations of the
OTS following the distribution;
 34




---



##### Table of Contents




    
    the proposed capital distribution would reduce the amount of or retire any part of
the savings associations common or preferred stock or retire any part of debt
instruments like notes or debentures included in capital, other than regular payments
required under a debt instrument approved by the OTS; or
    
    the savings association is a subsidiary of a savings and loan holding company.
  Community Reinvestment Act and the Fair Lending Laws
 Federal Home Loan Bank System
 
    
    1% of its aggregate outstanding principal amount of its residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each calendar year;
or
    
    5% of its FHLB advances or borrowings.
  Federal Reserve System
 Activities of Subsidiaries
 35




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Recent Legislation
 USA Patriot Act of 2001.
 Financial Services Modernization Legislation.
     36




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##### Table of Contents



Sarbanes-Oxley Act
  Regulation of Non-banking Affiliates
  
 Item 1A. Risk Factors
   Our business is subject to various lending risks which could adversely impact our results of
operations and financial condition.
 Our commercial real estate and multi-family residential loans involve higher principal amounts
than other loans, and repayment of these loans may be dependent on factors outside our control or
the control of our borrowers.
 37




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##### Table of Contents



Repayment of our commercial and industrial loans is often dependent on the cash flows of the
borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in
value.
 Our construction loans are based upon estimates of costs and value associated with the
complete project. These estimates may be inaccurate.
 Our consumer loans generally have a higher risk of default than our other loans
 38




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##### Table of Contents



Our allowance for loan losses may prove to be insufficient to absorb probable losses inherent in
our loan portfolio.
  
    
    cash flow of the borrower and/or the project being financed;
    
    in the case of a collateralized loan, the changes and uncertainties as to the future
value of the collateral;
    
    the credit history of a particular borrower;
    
    changes in economic and industry conditions; and
    
    the duration of the loan.
   Our business is subject to economic and other general risks which may adversely impact our results
of operations and financial condition.
 Changes in economic conditions, in particular an economic slowdown in the markets in which we
operate, could hurt our business.
 
    
    loan delinquencies may increase;
    
    problem assets and foreclosures may increase;
    
    demand for our products and services may decline;
    
    low cost or noninterest-bearing deposits may decrease; and
 39




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##### Table of Contents




    
    collateral, for loans made by us, especially real estate, may decline in value, in
turn reducing customers borrowing power.
 A downturn in the real estate market may adversely affect our business.
 We are exposed to risk of environmental liabilities with respect to properties to which we
take title.
 We may suffer losses in our loan portfolio despite our underwriting practices.
 Our business is subject to interest rate risk and variations in interest rates may negatively
affect our financial performance.
  40




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##### Table of Contents




    
    inflation;
    
    slow or stagnant economic growth or recession;
    
    unemployment;
    
    money supply and the monetary policies of the Federal Reserve Board;
    
    international disorders; and
    
    instability in domestic and foreign financial markets.
  Our investment portfolio includes securities and total rate of return swaps which are sensitive to
interest rates and spread changes and which we may be required to sell at a loss to meet our
liquidity needs.
  We invest in interest rate contracts which can cause losses to us in excess of the value at which
we carry these investments.
  41




---



##### Table of Contents




    
    basis or spread risk, which is the risk of loss associated with variations in the
spread between the interest rate contract and the hedged item;
    
    credit risk, which is the risk of the insolvency or other inability of another party
to the transaction to perform its obligations;
    
    interest rate risk;
    
    volatility risk, which is the risk that the expected uncertainty relating to the
price of the underlying asset differs from what is anticipated; and
    
    liquidity risk.
  We are subject to extensive regulation which could adversely affect our business.
  Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
  42




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##### Table of Contents



Our plan to expand the franchise with additional banking offices in California, Kansas and Arizona
may not be successful, which would negatively affect our growth strategy and prospects, and
profitability.
  We are dependent on key individuals and our ability to attract and retain banking professionals
with significant experience in our local markets.
   We rely on the investment advice and research of an independent advisor, and the loss of services
from that advisor could disrupt our business.
  43




---



##### Table of Contents



We face strong competition from other financial institutions, financial service companies and other
companies that offer banking services which can hurt our business.
   We continually encounter technological change, and we may have fewer resources than many of our
competitors to continue to invest in technological improvements.
  44




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##### Table of Contents



Our ability to service our Trust Preferred Securities, pay dividends, and otherwise pay our
obligations as they come due is substantially dependent on capital distributions from Los Padres
Bank, and these distributions are subject to regulatory limits and other restrictions.
  Provisions in our certificate of incorporation and bylaws limit the authority of our stockholders,
and therefore minority stockholders may not be able to significantly influence our governance or
affairs.
    45




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##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
 Office Locations
  Total Deposits atLeased/Owned
    
    Date Office
    
    December 31, 2005and
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Lease Expiration Date
    
    Date
    
    thousands)Solvang Branch and Administrative
Offices
610 Alamo Pintado Road
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one option
for five years
    
    June 1983
    
    $
    106,763Loan Center
1992 Old Mission Drive
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one option
for five years
    
    March 1998
    
    Pismo Branch
831 Oak Park Boulevard
Pismo Beach, CA 93449
    
    Lease expires on 2/9/08
with two options for
five years each
    
    May 1988
    
    
    71,607Atascadero Branch
7315 El Camino Real
Atascadero, CA 93422
    
    Lease expires on
4/30/06 with two
options for five years
each
    
    May 1991
    
    
    44,607Santa Maria Branch
402 E. Main Street
Santa Maria, CA 93454
    
    Lease expires on
6/30/07 with three
options for five years
each
    
    July 1992
    
    
    58,891Buellton Branch
234 E. Highway 246, Suite 109
Buellton, CA 93427
    
    Lease expires on
11/2/07 with one option
for five years
    
    December 1997
    
    
    20,548Goleta Branch
197 North Fairview
Goleta, CA 93117
    
    Lease expires on
10/31/08 with three
options for five years
each
    
    February 1999
    
    
    73,317San Luis Branch
1322 Madonna Road
San Luis Obispo, CA 93405
    
    Lease expires on
12/31/10 with one
option for five years
    
    January 2001
    
    
    19,700Nipomo Branch
542 W. Teft Road
Nipomo, CA 93444
    
    Lease expires on
12/31/10 with two
options for five years
each
    
    July 2001
    
    
    20,671
 46




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##### Table of Contents



Total Deposits atLeased/Owned
    
    Date Office
    
    December 31, 2005and
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Lease Expiration Date
    
    Date
    
    thousands)Storage Area
1120 Mission Drive
Solvang, CA 93463
    
    Month-to-month Lease
with no expiration date
    
    June 1992
    
    Human Resources, Compliance &
Training Room Suite A-4 and A-5
1984 Old Mission Drive
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one option
for five years.
    
    March 2000
    
    Loan Origination Center
Suite B-12
1988 Old Mission Drive
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one option
for five years
    
    April 2002
    
    Harrington Bank
6300 Nall Avenue
Kansas City, KS 66208
    
    Lease expires on
12/31/10 with four
options for five years
each
    
    November 2001
    
    
    63,842Harrington Wealth Management
Company
10150 Lantern Road, Suite 150
Fishers, IN 46038
    
    Lease expires on
10/31/11
    
    November 2001
    
    Arizona  Scottsdale Branch
10555 North 114th Street, Suite 100
Scottsdale, AZ 85295
    
    Lease expires on
9/30/12 with two
options for five years
each
    
    November 2002
    
    
    45,175Ventura Branch
1171 S. Victoria Ave., Suite A
Ventura, CA 93003
    
    Lease expires on
6/30/08 with four
options for five years
each
    
    May 2004
    
    
    30,457Thousand Oaks Branch
2920 Thousand Oaks Blvd, Suite A
Thousand Oaks, CA 91360
    
    Lease expires on
5/31/10 with three
options for five years
each.
    
    June 1, 2005
    
    
    32,732Arizona  Northsight Branch
14100 N. Northsight Blvd.
Scottsdale, AZ 85260
    
    Owned
    
    December 17, 2004
    
    
    23,459
 47




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##### Table of Contents



Total Deposits atLeased/Owned
    
    Date Office
    
    December 31, 2005and
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Lease Expiration Date
    
    Date
    
    thousands)Ojai Branch
110 South Ventura Street
Ojai, CA 93023
    
    Owned
    
    November 1997
    
    
    42,067Hanalei Bay Condo
5380 Honiki Road
Princeville, Kauai
    
    Owned
    
    July 1994
    
    Metcalf Branch
14300 Metcalf
Overland Park, KS 66223
    
    Owned
    
    December 2003
    
    
    15,309Olathe Branch
College & Pflumm Rds
Olathe, KS 66215
    
    Owned
    
    November 2005
    
    Surprise Branch
Bell Road & 114th Ave.
Surprise, AZ 85374
    
    Owned
    
    January 2006
    
    $
    669,145
 
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  48




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##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Stock Information
   Quarter Ended
    
    
    High
    
        

    Low
    
    

    DividendsMarch 31, 2004
    
    
    17.95
    
    
    
    13.46
    
    
    
    .08June 30, 2004
    
    
    17.65
    
    
    
    16.26
    
    
    
    .10September 30, 2004
    
    
    17.63
    
    
    
    15.52
    
    
    
    .10December 31, 2004
    
    
    19.63
    
    
    
    17.10
    
    
    
    .10March 31, 2005
    
    
    16.85
    
    
    
    16.56
    
    
    
    .11June 30, 2005
    
    
    15.46
    
    
    
    15.27
    
    
    
    .125September 30, 2005
    
    
    17.10
    
    
    
    17.00
    
    
    
    .125December 31, 2005
    
    
    16.70
    
    
    
    16.59
    
    
    
    .125
 Dividends
   49




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##### Table of Contents



Recent Sales of Unregistered Securities
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  50




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##### Table of Contents



Item 6. Selected Financial Data.
   At or For the Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Selected Financial Condition Data:Total assets
    
    $
    1,140,187
    
    
    $
    1,081,330
    
    
    $
    974,799
    
    
    $
    824,331
    
    
    $
    670,323Loans receivable, net
    
    
    672,890
    
    
    
    598,442
    
    
    
    518,496
    
    
    
    448,050
    
    
    
    449,709Securities available for sale
    
    
    387,352
    
    
    
    431,206
    
    
    
    398,691
    
    
    
    324,530
    
    
    
    181,627Securities held to maturity
    
    
    80
    
    
    
    93
    
    
    
    222
    
    
    
    2,368
    
    
    
    2,617Trading account assets
    
    
    975
    
    
    
    1,046
    
    
    
    2,111
    
    
    
    1,934
    
    
    
    2,751Deposits
    
    
    669,145
    
    
    
    598,182
    
    
    
    570,697
    
    
    
    525,271
    
    
    
    520,858Federal Home Loan Bank advances
    
    
    319,000
    
    
    
    316,000
    
    
    
    262,500
    
    
    
    235,000
    
    
    
    96,403Note payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,300
    
    
    
    18,000Securities sold under repurchase agreements
    
    
    59,013
    
    
    
    79,689
    
    
    
    65,728
    
    
    
    517
    
    
    
    365Other debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    15,464
    
    
    
    
    
    
    
    Stockholders equity
    
    
    59,574
    
    
    
    52,660
    
    
    
    48,076
    
    
    
    42,472
    
    
    
    30,144Shares outstanding
    
    
    5,384,843
    
    
    
    5,278,934
    
    
    
    5,206,109
    
    
    
    5,193,509
    
    
    
    4,025,171Selected Income Statement Data:Interest income
    
    $
    62,056
    
    
    $
    52,266
    
    
    $
    46,434
    
    
    $
    43,493
    
    
    $
    41,168Interest expense
    
    
    31,898
    
    
    
    22,718
    
    
    
    20,308
    
    
    
    21,921
    
    
    
    25,817Net interest income
    
    
    30,158
    
    
    
    29,548
    
    
    
    26,126
    
    
    
    21,572
    
    
    
    15,351Provision (credit) for loan losses
    
    
    435
    
    
    
    650
    
    
    
    790
    
    
    
    391
    
    
    
    1Net interest income after provision (credit) for loan losses
    
    
    29,723
    
    
    
    28,898
    
    
    
    25,336
    
    
    
    21,181
    
    
    
    15,350Other income:Income (loss) from trading account assets
    
    
    936
    
    
    
    1,261
    
    
    
    2,647
    
    
    
    (31
    )
    
    
    436Gain (loss) on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69(Loss) on extinguishment of debt
    
    
    
    
    
    
    (189
    )
    
    
    (1,610
    )
    
    
    
    
    
    
    Other gain (loss)
    
    
    (15
    )
    
    
    (57
    )
    
    
    30
    
    
    
    (350
    )
    
    
    (139
    )Banking fee income(1)
    
    
    3,948
    
    
    
    3,148
    
    
    
    4,108
    
    
    
    2,531
    
    
    
    1,135Other expenses:Salaries and employee benefits
    
    
    11,166
    
    
    
    10,522
    
    
    
    10,086
    
    
    
    7,847
    
    
    
    5,444Premises and equipment
    
    
    3,884
    
    
    
    3,153
    
    
    
    2,722
    
    
    
    2,197
    
    
    
    1,631Other expenses(2)
    
    
    6,026
    
    
    
    5,741
    
    
    
    5,041
    
    
    
    4,713
    
    
    
    3,242Income before income taxes
    
    
    13,516
    
    
    
    13,645
    
    
    
    12,662
    
    
    
    8,574
    
    
    
    6,534Income taxes
    
    
    5,180
    
    
    
    5,436
    
    
    
    5,249
    
    
    
    3,529
    
    
    
    2,732Net income
    
    $
    8,336
    
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045
    
    
    $
    3,802Common Stock Summary:Diluted earnings per share
    
    $
    1.48
    
    
    $
    1.46
    
    
    $
    1.36
    
    
    $
    1.15
    
    
    $
    0.93Dividends per share
    
    
    0.485
    
    
    
    0.88
    
    
    
    0.21
    
    
    
    0.08
    
    
    
    0.09Stockholders equity per share
    
    
    11.06
    
    
    
    9.98
    
    
    
    9.23
    
    
    
    8.18
    
    
    
    7.49Diluted weighted average shares outstanding
    
    
    5,620,556
    
    
    
    5,603,680
    
    
    
    5,455,002
    
    
    
    4,370,021
    
    
    
    4,076,262Selected Operating Data(3):Performance Ratios and Other Data:Return on average assets
    
    
    0.75
    %
    
    
    0.80
    %
    
    
    0.82
    %
    
    
    0.68
    %
    
    
    0.66
    %Return on average equity
    
    
    14.61
    
    
    
    16.30
    
    
    
    16.37
    
    
    
    15.36
    
    
    
    13.65Equity to assets
    
    
    5.14
    
    
    
    4.87
    
    
    
    4.93
    
    
    
    5.15
    
    
    
    4.50Interest rate spread (4)
    
    
    2.63
    
    
    
    2.77
    
    
    
    2.90
    
    
    
    2.97
    
    
    
    2.55Net interest margin (4)
    
    
    2.83
    
    
    
    2.93
    
    
    
    3.07
    
    
    
    3.14
    
    
    
    2.81Average interest-earning assets to average interest-bearing
liabilities
    
    
    106.61
    
    
    
    107.09
    
    
    
    107.03
    
    
    
    105.21
    
    
    
    105.51Total noninterest expenses to average total assets
    
    
    1.86
    
    
    
    1.88
    
    
    
    2.04
    
    
    
    1.97
    
    
    
    1.79Efficiency ratio(5)
    
    
    61.80
    
    
    
    59.38
    
    
    
    59.04
    
    
    
    61.22
    
    
    
    62.58
 51




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##### Table of Contents



At or For the Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Asset Quality Ratios(6):Non-performing assets and troubled debt
restructurings to total assets
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.03
    
    
    
    0.07Non-performing loans and troubled debt
restructurings to total loans
    
    
    0.00
    
    
    
    0.02
    
    
    
    0.00
    
    
    
    0.05
    
    
    
    0.11Allowance for loan losses to total loans
    
    
    0.84
    
    
    
    0.87
    
    
    
    0.88
    
    
    
    0.83
    
    
    
    0.83Net charge-offs to average loans outstanding
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.08
    
    
    
    Bank Regulatory Capital Ratios:Tier 1 risk-based capital ratio
    
    
    9.96
    
    
    
    10.37
    
    
    
    10.20
    
    
    
    11.14
    
    
    
    10.76Total risk-based capital ratio
    
    
    10.69
    
    
    
    11.13
    
    
    
    10.99
    
    
    
    11.97
    
    
    
    11.72Tier 1 leverage capital ratio
    
    
    6.78
    
    
    
    6.68
    
    
    
    6.08
    
    
    
    6.11
    
    
    
    6.27
 
 (1)
    
    Consists of service charges, wholesale mortgage banking income, other commissions and fees
and other miscellaneous noninterest income.(2)
    
    Consists of computer services, consulting fees, marketing and other miscellaneous noninterest
expenses.(3)
    
    With the exception of return on average assets and return on average equity, all ratios are
based on average daily balances.(4)
    
    Interest rate spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average rate on interest-bearing liabilities. Net
interest margin represents net interest income as a percentage of average interest-earning
assets.(5)
    
    Efficiency ratio represents noninterest expenses as a percentage of the aggregate of net
interest income before provision for loan losses and noninterest income, excluding gains on
sales of securities, deposits and loans.(6)
    
    Non-performing loans generally consist of non-accrual loans and non-performing assets
generally consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 
 Mission
  
 Multiple Market Strategy
      52




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Product Line Diversification
  
 Modern Financial Skills
  53




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##### Table of Contents



Control Banking Risks
  Performance Measurement
  
 Profitability Drivers
  1.
    
    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.The following pie charts illustrate the change in the loan mix to higher spread earning
loan categories from December 31, 2000 to December 31, 2005. At December 31, 2000,
lower margin, single-family loans were 50% of the loan portfolio compared to 17% at
December 31, 2005. Commercial real estate loans are 37% of the loan portfolio as of
December 31, 2005 versus 27% of the loan portfolio in December 31, 2000. Commercial and
industrial loans have increased to 14% of our loan portfolio as of December 31, 2005
from just 1% in December 31, 2000.
 (PIE CHART)
    
    (PIE CHART)
 54




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##### Table of Contents



2.
    
    Growing our non-costing consumer and commercial deposits and continuing to
change the mix of deposits to less 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. As such, we have increased
these accounts from 16% to 28% of deposits from December 31, 2000 to December 31, 2005.
 (PIE CHART)
    
    (PIE CHART)
 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.
 55




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##### Table of Contents



(Dollars in thousands)Year Ended December 31,%
    
    
    
    
    
    
    
    
    
    
    %Banking Fee Type
    
    2005
    
    
    2004
    
    
    Change
    
    
    2004
    
    
    2003
    
    
    ChangeMortgage
Brokerage Fees and
Prepayment
Penalties
    
    $
    1,077
    
    
    $
    1,290
    
    
    
    (16.5
    %)
    
    $
    1,290
    
    
    $
    2,566
    
    
    
    (49.7
    %)Other Loan Fees
    
    
    233
    
    
    
    226
    
    
    
    3.1
    %
    
    
    226
    
    
    
    223
    
    
    
    1.3
    %Deposit, Other
Retail Banking Fee
& Other Income
    
    
    1,293
    
    
    
    1022
    
    
    
    26.5
    %
    
    
    1022
    
    
    
    863
    
    
    
    18.0
    %Harrington
Wealth Management
Fees
    
    
    724
    
    
    
    610
    
    
    
    18.7
    %
    
    
    610
    
    
    
    456
    
    
    
    34.6
    %BOLI
    
    
    621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,948
    
    
    $
    3,148
    
    
    
    25.4
    %
    
    $
    3,148
    
    
    $
    4,108
    
    
    
    (23.4
    %)
 56




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##### Table of Contents



4.
    
    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. 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. From 2001 to 2005, the
investment portfolios performance has exceeded our goals and has contributed to our
record profit performance due to favorable selection of securities and spread
tightening on these securities. In 2005, the portfolio achieved a 50 basis points
total return to one month LIBOR due to the widening of spreads in the period. The
total excess return of the investment portfolio (the total return over one month LIBOR)
over the last five years has achieved a 2.57% total return spread to one month LIBOR
and a 1.54% spread since the portfolio was established in April of 1996.
 57




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5.
    
    Controlling 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. As such, non-performing asset
levels have been low with corresponding low loan charge-offs.
 
  58




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Critical Accounting Policies
 General
  Allowance for loan losses. Accounting for Contingencies, Accounting by Creditors for Impairment of a Loan Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures
 59




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Trading and Investment Portfolio
 Hedging Activity. Accounting for Derivative Instruments and Hedging Activities
 
 Results of Operations
 Summary of Earnings
  Net Interest Income
  60




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61




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Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-earning assets:Loans receivable(1)
    
    $
    636,490
    
    
    $
    43,269
    
    
    
    6.80
    %
    
    $
    561,665
    
    
    $
    36,166
    
    
    
    6.44
    %
    
    $
    490,174
    
    
    $
    33,147
    
    
    
    6.76
    %Securities and trading account
assets(2)
    
    
    408,753
    
    
    
    17,914
    
    
    
    4.38
    
    
    
    419,716
    
    
    
    15,439
    
    
    
    3.68
    
    
    
    331,437
    
    
    
    12,517
    
    
    
    3.78FHLB stock
    
    
    16,237
    
    
    
    709
    
    
    
    4.37
    
    
    
    14,197
    
    
    
    573
    
    
    
    4.04
    
    
    
    12,969
    
    
    
    579
    
    
    
    4.46Cash and cash equivalents(3)
    
    
    9,602
    
    
    
    164
    
    
    
    1.71
    
    
    
    12,318
    
    
    
    88
    
    
    
    0.71
    
    
    
    16,756
    
    
    
    191
    
    
    
    1.14Total interest-earning assets
    
    
    1,071,082
    
    
    
    62,056
    
    
    
    5.79
    
    
    
    1,007,896
    
    
    
    52,266
    
    
    
    5.18
    
    
    
    851,336
    
    
    
    46,434
    
    
    
    5.45Noninterest-earning assets
    
    
    38,813
    
    
    
    
    
    
    
    
    
    
    
    24,570
    
    
    
    
    
    
    
    
    
    
    
    22,263Total assets
    
    $
    1,109,895
    
    
    
    
    
    
    
    
    
    
    $
    1,032,466
    
    
    
    
    
    
    
    
    
    
    $
    873,599Interest-bearing liabilities:Deposits:NOW and money market
accounts
    
    $
    119,742
    
    
    
    1,945
    
    
    
    1.62
    
    
    $
    120,353
    
    
    
    1,154
    
    
    
    0.96
    
    
    $
    128,478
    
    
    
    1,392
    
    
    
    1.08Passbook accounts and
certificates of deposit
    
    
    475,374
    
    
    
    13,723
    
    
    
    2.89
    
    
    
    442,679
    
    
    
    9,475
    
    
    
    2.14
    
    
    
    385,314
    
    
    
    8,985
    
    
    
    2.33Totaldeposits
    
    
    595,116
    
    
    
    15,668
    
    
    
    2.63
    
    
    
    563,032
    
    
    
    10,629
    
    
    
    1.89
    
    
    
    513,792
    
    
    
    10,377
    
    
    
    2.02FHLB advances(4)
    
    
    314,066
    
    
    
    12,732
    
    
    
    4.05
    
    
    
    284,977
    
    
    
    9,285
    
    
    
    3.26
    
    
    
    233,320
    
    
    
    8,496
    
    
    
    3.64Reverse repurchase agreements
    
    
    69,720
    
    
    
    1,928
    
    
    
    2.77
    
    
    
    75,541
    
    
    
    1,981
    
    
    
    2.62
    
    
    
    35,468
    
    
    
    932
    
    
    
    2.63Other borrowings(5)
    
    
    25,774
    
    
    
    1,570
    
    
    
    6.09
    
    
    
    17,623
    
    
    
    823
    
    
    
    4.67
    
    
    
    12,856
    
    
    
    503
    
    
    
    3.91Total interest-bearing liabilities
    
    
    1,004,676
    
    
    
    31,898
    
    
    
    3.16
    
    
    
    941,173
    
    
    
    22,718
    
    
    
    2.41
    
    
    
    795,436
    
    
    
    20,308
    
    
    
    2.55Noninterest-bearing deposits
    
    
    41,579
    
    
    
    
    
    
    
    
    
    
    
    31,563
    
    
    
    
    
    
    
    
    
    
    
    21,551Noninterest-bearing liabilities
    
    
    6,564
    
    
    
    
    
    
    
    
    
    
    
    9,358
    
    
    
    
    
    
    
    
    
    
    
    11,338Total liabilities
    
    
    1,052,819
    
    
    
    
    
    
    
    
    
    
    
    982,094
    
    
    
    
    
    
    
    
    
    
    
    828,325Stockholders equity
    
    
    57,076
    
    
    
    
    
    
    
    
    
    
    
    50,372
    
    
    
    
    
    
    
    
    
    
    
    45,274Total liabilities and stockholders
equity
    
    $
    1,109,895
    
    
    
    
    
    
    
    
    
    
    $
    1,032,466
    
    
    
    
    
    
    
    
    
    
    $
    873,599Net interest-earning assets
(liabilities)
    
    $
    66,406
    
    
    
    
    
    
    
    
    
    
    $
    66,723
    
    
    
    
    
    
    
    
    
    
    $
    55,900Net interest income/interest rate
spread
    
    
    
    
    
    $
    30,158
    
    
    
    2.63
    
    
    
    
    
    
    $
    29,548
    
    
    
    2.77
    
    
    
    
    
    
    $
    26,126
    
    
    
    2.90Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.83
    
    
    
    
    
    
    
    
    
    
    
    2.93
    
    
    
    
    
    
    
    
    
    
    
    3.07Ratio of average interest-earnings
assets to average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    106.61
    
    
    
    
    
    
    
    
    
    
    
    107.09
    
    
    
    
    
    
    
    
    
    
    
    107.03
 
 (1)
    
    Includes non-accrual loans. Interest income includes fees earned on loans originated.(2)
    
    Consists of securities classified as available for sale and held to maturity and trading
account assets.(3)
    
    Consists of cash and due from banks and federal funds sold.(4)
    
    Interest on FHLB advances is net of hedging costs. We use interest rate swaps to hedge the
short-term repricing characteristics of our floating-rate FHLB advances. See Asset and
Liability Management.(5)
    
    Consists of a note payable under a revolving line of credit and the subordinated debt. 62




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Rate/Volume Analysis
  Year Ended December 31, 2005
    
    
    Year Ended December 31, 2004Compared to Year Ended December 31, 2004
    
    
    Compared to Year Ended December 31, 2003Increase (decrease) due to
    
    
    
    
    
    
    Increase (decrease) due toTotal Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total NetRate/
    
    
    Increase
    
    
    
    
    
    
    
    
    
    
    Rate/
    
    
    IncreaseRate
    
    
    Volume
    
    
    Volume
    
    
    (Decrease)
    
    
    Rate
    
    
    Volume
    
    
    Volume
    
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable
    
    $
    2,022
    
    
    $
    4,819
    
    
    $
    262
    
    
    $
    7,103
    
    
    $
    (1,584
    )
    
    $
    4,834
    
    
    $
    (231
    )
    
    $
    3,019Securities and trading account
Assets (1)
    
    
    2,938
    
    
    
    (403
    )
    
    
    (60
    )
    
    
    2,475
    
    
    
    (325
    )
    
    
    3,334
    
    
    
    (87
    )
    
    
    2,922FHLB stock
    
    
    47
    
    
    
    82
    
    
    
    7
    
    
    
    136
    
    
    
    (56
    )
    
    
    55
    
    
    
    (5
    )
    
    
    (6
    )Cash and cash equivalents (2)
    
    
    123
    
    
    
    (19
    )
    
    
    (28
    )
    
    
    76
    
    
    
    (71
    )
    
    
    (51
    )
    
    
    19
    
    
    
    (103
    )Total net change in income on
interest-earning assets
    
    
    5,130
    
    
    
    4,479
    
    
    
    181
    
    
    
    9,790
    
    
    
    (2,036
    )
    
    
    8,172
    
    
    
    (304
    )
    
    
    5,832Interest-bearing liabilities:DepositsNOW and money market
accounts
    
    
    794
    
    
    
    (6
    )
    
    
    3
    
    
    
    791
    
    
    
    (160
    )
    
    
    (88
    )
    
    
    10
    
    
    
    (238
    )Passbook accounts and
certificates of deposit
    
    
    3,320
    
    
    
    700
    
    
    
    228
    
    
    
    4,248
    
    
    
    (738
    )
    
    
    1,338
    
    
    
    (110
    )
    
    
    490Total deposits
    
    
    4,114
    
    
    
    694
    
    
    
    231
    
    
    
    5,039
    
    
    
    (898
    )
    
    
    1,250
    
    
    
    (100
    )
    
    
    252FHLB advances (3)
    
    
    2,251
    
    
    
    948
    
    
    
    248
    
    
    
    3,447
    
    
    
    (894
    )
    
    
    1,881
    
    
    
    (198
    )
    
    
    789Reverse repurchase agreements
    
    
    113
    
    
    
    (150
    )
    
    
    (16
    )
    
    
    (53
    )
    
    
    (2
    )
    
    
    1,053
    
    
    
    (2
    )
    
    
    1,049Other borrowings (4)
    
    
    250
    
    
    
    374
    
    
    
    123
    
    
    
    747
    
    
    
    97
    
    
    
    187
    
    
    
    36
    
    
    
    320Total net change in expense on
interest-bearing liabilities
    
    
    6,728
    
    
    
    1,866
    
    
    
    586
    
    
    
    9,180
    
    
    
    (1,697
    )
    
    
    4,371
    
    
    
    (264
    )
    
    
    2,410Change in net interest income
    
    $
    (1,598
    )
    
    $
    2,613
    
    
    $
    (405
    )
    
    $
    610
    
    
    $
    (339
    )
    
    $
    3,801
    
    
    $
    (40
    )
    
    $
    3,422
 
 (1)
    
    Consists of securities classified as available for sale and held to maturity and trading
account assets.(2)
    
    Consists of cash and due from banks and federal funds sold.(3)
    
    Interest on FHLB advances is net of cash flow hedging costs. We use interest rate swaps to
hedge the short-term repricing characteristics of our floating-rate FHLB advances. See
Asset and Liability Management.(4)
    
    Consists of a note payable under a revolving line of credit and the subordinated
debt. 63




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Interest Income
 Interest Expense
  Provision for Loan Losses
 Other Income
 64




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003(In Thousands)Income (loss) from trading account assets
    
    $
    936
    
    
    $
    1,261
    
    
    $
    2,647(Loss) on extinguishment of debt
    
    
    
    
    
    
    (189
    )
    
    
    (1,610
    )Other gain (loss)
    
    
    (15
    )
    
    
    (57
    )
    
    
    30Banking fee income (1)
    
    
    3,948
    
    
    
    3,148
    
    
    
    4,108Total other income
    
    $
    4,869
    
    
    $
    4,163
    
    
    $
    5,175
 
 (1)
    
    Consists primarily of banking fee income such as service charges and fees on deposit
accounts, fees from our trust and investment management services, and other
miscellaneous fees.   65




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Other Expenses
 Year Ended December 31,2005
    
    
    2004
    
    
    2003(In Thousands)Salaries and employee benefits
    
    $
    11,166
    
    
    $
    10,522
    
    
    $
    10,086Premises and equipment
    
    
    3,884
    
    
    
    3,153
    
    
    
    2,722Insurance premiums
    
    
    509
    
    
    
    486
    
    
    
    520Marketing
    
    
    403
    
    
    
    427
    
    
    
    320Computer services
    
    
    785
    
    
    
    696
    
    
    
    640Consulting fees
    
    
    1,271
    
    
    
    1,188
    
    
    
    1,011Office expenses and supplies
    
    
    870
    
    
    
    824
    
    
    
    762Other (1)
    
    
    2,188
    
    
    
    2,120
    
    
    
    1,788Total other expenses
    
    $
    21,076
    
    
    $
    19,416
    
    
    $
    17,849
 
 (1)
    
    Consists primarily of professional fees, and other miscellaneous expenses.      66




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Income Taxes
 
 Changes in Financial Condition
 General
 Cash and Cash Equivalents
 Securities
  Trading Account Assets.
 67




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##### Table of Contents



Loans Receivable.
 Allowance for Loan Losses.
 Prepaid expenses and other assets.
 Deposits.
 Borrowings.
 
 68




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Stockholders Equity
 
 Asset and Liability Management
      69




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i.e.,
    Accounting for Derivative Instruments and Hedging Activities,
 70




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i.e i.e
     71




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72




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Change In Interest Rates (In Basis Points)(1)-300
    
    
    -200
    
    
    -100
    
    
    -
    
    
    +100
    
    
    +200
    
    
    +300(Dollars in Thousands)Market value gain (loss) in assets
    
    $
    34,553
    
    
    $
    25,333
    
    
    $
    14,260
    
    
    
    
    
    
    $
    (17,231
    )
    
    $
    (36,436
    )
    
    $
    (56,745
    )Market value gain (loss) of liabilities
    
    
    (23,899
    )
    
    
    (16,488
    )
    
    
    (8,421
    )
    
    
    
    
    
    
    8,541
    
    
    
    17,184
    
    
    
    26,039Market value gain (loss) of net assets
before interest rate contracts
    
    
    10,654
    
    
    
    8,845
    
    
    
    5,839
    
    
    
    
    
    
    
    (8,690
    )
    
    
    (19,252
    )
    
    
    (30,706
    )Market value gain (loss) of interest
rate contracts
    
    
    (14,259
    )
    
    
    (9,237
    )
    
    
    (4,493
    )
    
    
    
    
    
    
    4,235
    
    
    
    8,258
    
    
    
    12,069Total change in MVPE(2)
    
    $
    (3,605
    )
    
    $
    (392
    )
    
    $
    1,346
    
    
    
    
    
    
    $
    (4,455
    )
    
    $
    (10,994
    )
    
    $
    (18,637
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -3.76
    %
    
    
    -0.41
    %
    
    
    1.40
    %
    
    
    
    
    
    
    -4.65
    %
    
    
    -11.47
    %
    
    
    -19.44
    %Total assets of Los Padres Bank
    
    
    -0.55
    %
    
    
    -0.22
    %
    
    
    0.01
    %
    
    
    
    
    
    
    -0.27
    %
    
    
    -0.72
    %
    
    
    -1.28
    %
 
 (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on our pre-tax MVPE of $95.9 million at December 31, 2005.  
 Liquidity and Capital Resources
 Liquidity.
   73




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Capital Resources.
 74




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##### Table of Contents



Tier 1 LeverageTangible Capital(1)
    
    
    Capital(1)
    
    
    Risk-Based CapitalAmount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Actual regulatory capital
    
    $
    76,933
    
    
    
    6.78
    %
    
    $
    76,933
    
    
    
    6.78
    %
    
    $
    82,594
    
    
    
    10.69
    %Minimum regulatory capital
    
    
    17,010
    
    
    
    1.50
    
    
    
    45,361
    
    
    
    4.00
    
    
    
    61,784
    
    
    
    8.00Excess regulatory capital
    
    $
    59,923
    
    
    
    5.28
    %
    
    $
    31,572
    
    
    
    2.78
    %
    
    $
    20,810
    
    
    
    2.69
    %
 
 (1)
    
    The tangible capital is computed as a percentage of tangible assets and Tier 1 leverage
capital is computed as a percentage of the adjusted total assets, both of which are $76.9
million as of December 31, 2005. 75




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Contractual Obligations and Commercial Commitments
  Payment due periodLess than
    
    
    One to
    
    
    Three to
    
    
    More thanTotal
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)Contractual obligations:Certificates of deposit
    
    $
    482,212
    
    
    $
    450,105
    
    
    $
    21,633
    
    
    $
    10,323
    
    
    $
    151FHLB advances
    
    
    319,000
    
    
    
    300,000
    
    
    
    
    
    
    
    19,000
    
    
    
    Reverse repurchase agreements
    
    
    59,058
    
    
    
    58
    
    
    
    44,000
    
    
    
    15,000
    
    
    
    Leases
    
    
    21,166
    
    
    
    1,295
    
    
    
    2,634
    
    
    
    2,694
    
    
    
    14,543Other debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Due to broker
    
    
    2,474
    
    
    
    2,474
    
    
    
    
    
    
    
    
    
    
    
    Interest expense (1)
    
    
    80,114
    
    
    
    21,281
    
    
    
    10,597
    
    
    
    8,137
    
    
    
    40,099Total contractual
obligations
    
    $
    989,798
    
    
    $
    775,213
    
    
    $
    78,864
    
    
    $
    55,154
    
    
    $
    80,567
 
 (1)
    
    Includes interest expense associated with the commitments for our FHLB Advances, Reverse
Repurchase Agreements, Other Debt and Certificates of Deposit at the current interest rate. Amount of Commitment Expiration Per PeriodUnfunded
    
    
    Less than
    
    
    One to
    
    
    Three to
    
    
    AfterCommitments
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)Commitments:Commercial lines of credit
    
    $
    40,139
    
    
    $
    33,300
    
    
    $
    2,993
    
    
    $
    885
    
    
    $
    2,961Consumer lines of credit (1)
    
    
    46,423
    
    
    
    2,059
    
    
    
    
    
    
    
    202
    
    
    
    44,162Undisbursed portion of loans in process
    
    
    78,306
    
    
    
    31,309
    
    
    
    46,997
    
    
    
    
    
    
    
    Approved but, not funded mortgage loans
    
    
    6,531
    
    
    
    6,531
    
    
    
    
    
    
    
    
    
    
    
    Approved but, not funded commercial
loans
    
    
    8,292
    
    
    
    8,292
    
    
    
    
    
    
    
    
    
    
    
    Approved but not funded consumer loans
    
    
    1,080
    
    
    
    1,080
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    4,560
    
    
    
    3,060
    
    
    
    1,500
    
    
    
    
    
    
    
    Total commitments
    
    $
    185,331
    
    
    $
    85,631
    
    
    $
    51,490
    
    
    $
    1,087
    
    
    $
    47,123
 
 (1)
    
    Lines of credit with no stated maturity date are included in commitments for less than one
year. 
 Off-Balance Sheet Arrangements
  76




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##### Table of Contents



Contract or

    
    
    
    


    
    Weighted-AverageNotional

    
    Estimated

    
    Interest RateAmount
    
    Fair Value
    

    Receivable
    
    PayableDecember 31,
2005 Interest rate swaps  pay fixed
receive 3-month LIBOR
    
    $
    152,000
    
    
    $
    33
    
    
    
    4.39
    %
    
    
    4.42
    %December 31,
2004 Interest rate swaps  pay fixed
receive 3-month LIBOR
    
    $
    152,000
    
    
    $
    (4,134
    )
    
    
    2.35
    %
    
    
    4.42
    %
  Maturities
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    23,000
    
    
    $
    52,000
    
    
    $
    4,000
    
    
    $
    25,000
    
    
    $
    10,000
    
    
    $
    38,000Weighted-average
payable rate
    
    
    2.92
    %
    
    
    3.80
    %
    
    
    3.78
    %
    
    
    5.77
    %
    
    
    6.29
    %
    
    
    4.85
    %Weighted-average
receivable rate
    
    
    4.42
    %
    
    
    4.41
    %
    
    
    4.18
    %
    
    
    4.41
    %
    
    
    4.48
    %
    
    
    4.33
    %
  77




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##### Table of Contents



Inflation and Changing Prices
  
 Recent Accounting Pronouncements
 Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
 Share-Based Payment Accounting for Stock Issued to
Employees, Accounting
for Stock-Based Compensation
  78




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##### Table of Contents



Accounting Changes and Error Corrections
 The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments
 Terms of Loan
Products That May Give Rise to a Concentration of Credit Risk Disclosures about Fair Value of Financial Instruments
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .
  79




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
  PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    81CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Statements of Financial Condition  December 31, 2005 and 2004
    
    82Consolidated Statements of Earnings for the Years Ended December 31, 2005, 2004 and 2003
    
    83Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005, 2004 and 2003
    
    84Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
    
    86Notes to Consolidated Financial Statements
    
    88
 80




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 81




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (Dollars in thousands, except share data)
 December 31,2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    19,312
    
    
    $
    13,238Trading account assets
    
    
    975
    
    
    
    1,046Securities available for sale at fair value
(with amortized cost of $390,691 in 2005 and $430,782 in 2004)
    
    
    387,352
    
    
    
    431,206Securities held to maturity (fair value of $84 in 2005 and $99 in 2004)
    
    
    80
    
    
    
    93Loans receivable, net of allowance for loan losses of $5,661 in 2005
and $5,228 in 2004
    
    
    672,890
    
    
    
    598,442Accrued interest receivable
    
    
    4,463
    
    
    
    3,322Premises and equipment, net
    
    
    10,276
    
    
    
    9,136Prepaid expenses and other assets
    
    
    3,783
    
    
    
    3,495Investment in FHLB stock, at cost
    
    
    16,364
    
    
    
    15,134Income taxes receivable
    
    
    251
    
    
    
    Bank-owned life insurance
    
    
    17,621
    
    
    
    Deferred taxes
    
    
    137
    
    
    
    1,314Goodwill
    
    
    5,496
    
    
    
    3,981Core deposit intangible, net
    
    
    1,187
    
    
    
    923TOTAL
    
    $
    1,140,187
    
    
    $
    1,081,330LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Interest bearing
    
    $
    619,213
    
    
    $
    564,552Noninterest bearing
    
    
    49,932
    
    
    
    33,630Total deposits
    
    
    669,145
    
    
    
    598,182FHLB advances
    
    
    319,000
    
    
    
    316,000Securities sold under repurchase agreements
    
    
    59,013
    
    
    
    79,689Subordinated debt
    
    
    25,774
    
    
    
    25,774Due to broker
    
    
    2,474
    
    
    
    Accrued interest payable and other liabilities
    
    
    5,207
    
    
    
    8,563Income taxes payable
    
    
    
    
    
    
    462Total liabilities
    
    
    1,080,613
    
    
    
    1,028,670COMMITMENTS AND CONTINGENCIES (Notes 2 and 14)STOCKHOLDERS EQUITY:Preferred stock, $.01 par value; 1,200,000 shares authorized;
none issued and outstandingCommon stock, $.01 par value; 10,800,000 shares authorized;
5,384,843 shares issued and outstanding as of December 31, 2005
and 5,278,934 shares issued and outstanding December 31, 2004
    
    
    54
    
    
    
    53Additional paid-in capital
    
    
    32,059
    
    
    
    31,225Retained earnings
    
    
    29,458
    
    
    
    23,637Accumulated other comprehensive loss, net of tax
    
    
    (1,997
    )
    
    
    (2,255
    )Total stockholders equity
    
    
    59,574
    
    
    
    52,660TOTAL
    
    $
    1,140,187
    
    
    $
    1,081,330
  82




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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF EARNINGS
 (Dollars in thousands, except share and per share data)
 Year EndedDecember 31,2005
    
    
    2004
    
    
    2003INTEREST INCOME:Interest on loans
    
    $
    43,269
    
    
    $
    36,166
    
    
    $
    33,147Interest and dividends on securities
    
    
    18,787
    
    
    
    16,100
    
    
    
    13,287Total interest income
    
    
    62,056
    
    
    
    52,266
    
    
    
    46,434INTEREST EXPENSE:Interest on deposits
    
    
    15,668
    
    
    
    10,629
    
    
    
    10,377Interest on FHLB advances and subordinated debt
    
    
    16,230
    
    
    
    12,089
    
    
    
    9,931Total interest expense
    
    
    31,898
    
    
    
    22,718
    
    
    
    20,308NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    
    
    30,158
    
    
    
    29,548
    
    
    
    26,126PROVISION FOR LOAN LOSSES
    
    
    435
    
    
    
    650
    
    
    
    790NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    29,723
    
    
    
    28,898
    
    
    
    25,336OTHER INCOME (LOSS):Income from trading account assets and realized gains from the sale
of securities available for sale
    
    
    936
    
    
    
    1,261
    
    
    
    2,647Loss on extinguishment of debt
    
    
    
    
    
    
    (189
    )
    
    
    (1,610
    )Other gain (loss)
    
    
    (15
    )
    
    
    (57
    )
    
    
    30Banking fee income
    
    
    3,948
    
    
    
    3,148
    
    
    
    4,108Total other income
    
    
    4,869
    
    
    
    4,163
    
    
    
    5,175OTHER EXPENSES:Salaries and employee benefits
    
    
    11,166
    
    
    
    10,522
    
    
    
    10,086Premises and equipment
    
    
    3,884
    
    
    
    3,153
    
    
    
    2,722Insurance premiums
    
    
    509
    
    
    
    486
    
    
    
    520Marketing
    
    
    403
    
    
    
    427
    
    
    
    320Computer services
    
    
    785
    
    
    
    696
    
    
    
    640Consulting fees
    
    
    1,271
    
    
    
    1,188
    
    
    
    1,011Office expenses and supplies
    
    
    870
    
    
    
    824
    
    
    
    762Other
    
    
    2,188
    
    
    
    2,120
    
    
    
    1,788Total other expenses
    
    
    21,076
    
    
    
    19,416
    
    
    
    17,849INCOME BEFORE INCOME TAXES
    
    
    13,516
    
    
    
    13,645
    
    
    
    12,662INCOME TAXES
    
    
    5,180
    
    
    
    5,436
    
    
    
    5,249NET INCOME
    
    $
    8,336
    
    
    $
    8,209
    
    
    $
    7,413BASIC EARNINGS PER SHARE
    
    $
    1.56
    
    
    $
    1.56
    
    
    $
    1.43DILUTED EARNINGS PER SHARE
    
    $
    1.48
    
    
    $
    1.46
    
    
    $
    1.36BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    5,347,757
    
    
    
    5,256,030
    
    
    
    5,197,008DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    5,620,556
    
    
    
    5,603,680
    
    
    
    5,455,002
  83




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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Income/(Loss)
    
    
    EquityBALANCE, DECEMBER 31, 2002
    
    
    5,193,509
    
    
    $
    52
    
    
    $
    30,641
    
    
    $
    13,786
    
    
    
    
    
    
    $
    (2,007
    )
    
    $
    42,472Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,413
    
    
    $
    7,413
    
    
    
    
    
    
    
    7,413Other comprehensive income,
net of taxUnrealized losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,245
    )
    
    
    (1,245
    )
    
    
    (1,245
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    493
    
    
    
    493Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,661Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,126
    )
    
    
    
    
    
    
    
    
    
    
    69Stock options exercised
    
    
    12,600
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,126
    )BALANCE, DECEMBER 31, 2003
    
    
    5,206,109
    
    
    
    52
    
    
    
    30,710
    
    
    
    20,073
    
    
    
    
    
    
    
    (2,759
    )
    
    
    48,076Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,209
    
    
    $
    8,209
    
    
    
    
    
    
    
    8,209Other comprehensive income,
net of taxUnrealized (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (324
    )
    
    
    (324
    )
    
    
    (324
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    828
    
    
    
    828Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,713Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,645
    )
    
    
    
    
    
    
    
    
    
    
    (4,645
    )Stock options exercised
    
    
    72,825
    
    
    
    1
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516BALANCE, DECEMBER 31, 2004
    
    
    5,278,934
    
    
    
    53
    
    
    
    31,225
    
    
    
    23,637
    
    
    
    
    
    
    
    (2,255
    )
    
    
    52,660Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,336
    
    
    $
    8,336
    
    
    
    
    
    
    
    8,336Other comprehensive income,
net of taxUnrealized (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,270
    )
    
    
    (2,270
    )
    
    
    (2,270
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,528
    
    
    
    2,528
    
    
    
    2,528Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,594Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,515
    )
    
    
    
    
    
    
    
    
    
    
    (2,515
    )Stock options exercised, including
tax benefit of $250
    
    
    105,909
    
    
    
    1
    
    
    
    834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    835BALANCE, DECEMBER 31, 2005
    
    
    5,384,843
    
    
    $
    54
    
    
    $
    32,059
    
    
    $
    29,458
    
    
    
    
    
    
    $
    (1,997
    )
    
    $
    59,574
  84




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)
 Year EndedDecember 31,2005
    
    
    2004
    
    
    2003DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding (losses) gains arising during the period,
net of tax (benefit) expense of ($1,123), $58
and ($266) for 2005, 2004 and 2003, respectively
    
    $
    (1,706
    )
    
    $
    85
    
    
    $
    (375
    )Less: Reclassification adjustment for gains (losses) included in
net income, net of tax expense (benefit) of $369, $281 and
$617 for 2005, 2004 and 2003, respectively
    
    
    564
    
    
    
    409
    
    
    
    870Net unrealized (loss) gain on securities, net of tax (benefit)
expense of ($1,492), ($223) and ($883) for 2005, 2004
and 2003, respectively:
    
    
    (2,270
    )
    
    
    (324
    )
    
    
    (1,245
    )Unrealized net gains (losses) on cash flow hedges, net of tax expense
(benefit) of $1,733, $631 and $380 for 2005, 2004
and 2003, respectively:
    
    
    2,524
    
    
    
    919
    
    
    
    535Less: reclassification adjustment for net gains (losses) on
cash flow hedges included in net income, net of
tax expense (benefit) of ($2), $63 and ($30) for 2005, 2004
and 2003, respectively
    
    
    (4
    )
    
    
    91
    
    
    
    42Net unrealized gain (loss) on cash flow hedges, net of tax (benefit)
expense of $1,735, $569 and $350 for 2005, 2004
and 2003, respectively:
    
    
    2,528
    
    
    
    828
    
    
    
    493Total change in other comprehensive (loss) income
    
    $
    258
    
    
    $
    504
    
    
    $
    (752
    )
 See notes to consolidated financial statements.
    
    (Concluded)
 85




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 Year EndedDecember 31,2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    8,336
    
    
    $
    8,209
    
    
    $
    7,413Adjustments to reconcile net income to net cash provided by
operating activities:Accretion of deferred loan fees and costs
    
    
    767
    
    
    
    338
    
    
    
    (2,006
    )Depreciation and amortization
    
    
    1,452
    
    
    
    1,204
    
    
    
    1,076Amortization of premiums and discounts on loans receivable and securities
    
    
    2,589
    
    
    
    3,171
    
    
    
    4,198Deferred income taxes
    
    
    1,023
    
    
    
    781
    
    
    
    (943
    )Provision for loan losses
    
    
    435
    
    
    
    650
    
    
    
    790Activity in securities held for trading
    
    
    71
    
    
    
    1,059
    
    
    
    (180
    )Gain on sale of investment securities
    
    
    (933
    )
    
    
    (690
    )
    
    
    (1,487
    )FHLB stock dividend
    
    
    (675
    )
    
    
    (557
    )
    
    
    (573
    )(Decrease) increase in accrued interest receivable
    
    
    (1,141
    )
    
    
    (394
    )
    
    
    598(Increase) decrease in income taxes (payable) receivable
    
    
    (713
    )
    
    
    (250
    )
    
    
    963(Increase) decrease in prepaid expenses and other assets
    
    
    398
    
    
    
    (1,877
    )
    
    
    (106
    )(Decrease) increase in accrued interest payable and other liabilities
    
    
    (507
    )
    
    
    (1,684
    )
    
    
    2,270Net cash provided by operating activities
    
    
    11,102
    
    
    
    9,960
    
    
    
    12,013CASH FLOWS FROM INVESTING ACTIVITIES:Net (increase) decrease in loans receivable
    
    
    (75,783
    )
    
    
    (81,505
    )
    
    
    (69,688
    )Proceeds from matured and called securities held to maturity
    
    
    
    
    
    
    
    
    
    
    2,000Proceeds from sales of securities available for sale
    
    
    61,819
    
    
    
    28,316
    
    
    
    34,033Purchases of securities available for sale
    
    
    (105,207
    )
    
    
    (154,529
    )
    
    
    (255,527
    )Principal paydowns on securities available for sale
    
    
    84,446
    
    
    
    91,479
    
    
    
    143,083Principal paydowns on securities held to maturity
    
    
    13
    
    
    
    129
    
    
    
    133Purchase of bank-owned life insurance
    
    
    (17,000
    )
    
    
    
    
    
    
    Acquisition, net of cash acquired
    
    
    (1,954
    )
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (2,414
    )
    
    
    (3,463
    )
    
    
    (2,867
    )Purchase of FHLB stock
    
    
    (555
    )
    
    
    (1,152
    )
    
    
    (1,102
    )Net cash used in investing activities
    
    
    (56,635
    )
    
    
    (120,725
    )
    
    
    (149,935
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    70,963
    
    
    
    27,504
    
    
    
    45,745(Decrease) Increase in securities sold under agreements to repurchase
    
    
    (20,676
    )
    
    
    13,962
    
    
    
    65,215Increase in FHLB advances
    
    
    3,000
    
    
    
    53,500
    
    
    
    27,500(Repayments) advances on note payable
    
    
    
    
    
    
    
    
    
    
    (11,300
    )Increase in subordinated debt
    
    
    
    
    
    
    10,310
    
    
    
    15,464Exercise of stock options on common stock
    
    
    835
    
    
    
    516
    
    
    
    69Dividends paid on common stock
    
    
    (2,515
    )
    
    
    (4,645
    )
    
    
    (1,127
    )Net cash provided by financing activities
    
    
    51,607
    
    
    
    101,147
    
    
    
    141,566NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    6,074
    
    
    
    (9,618
    )
    
    
    3,644CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    13,238
    
    
    
    22,856
    
    
    
    19,212CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    19,312
    
    
    $
    13,238
    
    
    $
    22,856(Continued)
 86




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Year EndedDecember 31,2005
    
    2004
    
    2003SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION Cash paid during the year for:Interest
    
    $
    30,169
    
    
    $
    18,803
    
    
    $
    16,443Income taxes
    
    $
    4,016
    
    
    $
    5,522
    
    
    $
    5,234Dividend in kind
    
    $
    0
    
    
    $
    0
    
    
    $
    (757
    )
  See notes to consolidated financial statements
    
    (Concluded)
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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business of the Company- Harrington West Financial Group, Inc. is a savings and loan holding
company incorporated on August 29, 1995 to acquire and hold all of the outstanding common
stock of Los Padres Bank (the Bank), referred to herein on a consolidated basis as the
Company. The Bank is a federally chartered savings bank which operates 15 branches serving
individuals and small to medium-sized businesses. Eleven banking facilities are operated on
the California Central Coast, two banking facilities are located in Kansas, and operated as a
division under the Harrington Bank brand, and two banking facilities are located in
Scottsdale, Arizona.On February 1, 1999, the Bank purchased a 49% interest in Harrington Wealth Management Company
(HWMC). HWMC offers trust and investment management services to the customers of the Bank.
On October 31, 2001, the Bank purchased the remaining 51% interest in HWMC. Beginning in
November 2001, HWMC became a wholly owned subsidiary of the Bank and is consolidated into the
Bank. HWMC performs management of investment portfolios through knowledge and analysis of the
customers investment needs, risk tolerance, tax situation and investment horizon. At
December 31, 2005, HWMC administered approximately 394 accounts and had $143.1 million of
assets under management that are not included on the consolidated statements of financial
condition. For the years ended December 31, 2005, 2004 and 2003, HWMC generated revenues of
$726,000, $614,000 and $456,000, respectively.On November 3, 2001, the Bank purchased from Harrington Bank, FSB, its $75 million bank
located in Shawnee Mission, Kansas, in the heart of the Kansas City metropolis.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.Principles of Consolidation The consolidated financial statements include the accounts of
Harrington West Financial Group, Inc. and its wholly owned subsidiary, Los Padres Bank (the
Bank), and the Banks wholly owned subsidiaries. All intercompany transactions and accounts
have been eliminated in consolidation. The Company also has two wholly-owned subsidiaries
that are statutory business trusts (the Trusts). In accordance with Financial Accounting
Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities(FIN No.
46R), the Trusts are not consolidated into the accounts of Harrington West Financial Group,
Inc.Segments- The Company has a single operating segment, banking operations.Cash and Cash Equivalents- For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
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Trading Securities- Trading securities are debt and equity securities that are bought and
held principally for the purpose of active management. These securities are reported at fair
value and included in trading account assets on the statements of financial condition.
Realized and unrealized gains and losses are included in income from trading account assets.Available for Sale Securities- Debt and equity securities not classified as either held to
maturity or trading securities are classified as securities available for sale and recorded at
fair value, with unrealized gains and losses, after applicable taxes, excluded from earnings
and reported as a separate component of stockholders equity. Declines in the value of debt
securities and marketable equity securities that are considered to be other than temporary are
recorded as realized losses in the statement of earnings. Amortization of premiums and
accretion of discounts on securities are recorded as yield adjustments on such securities
using an effective interest method that considers estimates of future principal prepayments
Gains and losses on the sale of securities are recorded on the trade date and are determined
using the specific identification method.A security may become impaired, i.e. there may be an unrecognized loss. The impairment may be
temporary or other than temporary. In the case of debt securities, the impairment may imply a
judgment by the market that the issuer will not be able to make interest and principal
payments as contractually required. Alternatively, the impairment may be due only to changes
in interest rates that do not impact the issuers ability to meet its contractual obligations.
The Company periodically reviews impaired securities to determine whether the impairment is
other than temporary. If the impairment is determined to be other than temporary, the Company
will recognize this impairment by charging a realized loss to earnings in the period in which
the impairment occurs or is otherwise deemed to be other than temporarily impaired.Held to Maturity Securities- Held to maturity securities represent investments that the Bank
has the positive intent and ability to hold to maturity and are reported at amortized cost.
Declines in the value of held to maturity securities that are considered to be other than
temporary are recorded as realized losses in the statement of earnings. Similar to available
for sale securities, premiums and discounts are amortized using an effective interest method
that considers estimates of future principal prepayments.Loans Receivable- Loans receivable are carried at the principal amount outstanding, net of
deferred loan fees, costs, premiums and allowance for loan losses.Loan Interest Income and Fees- Interest on loans is accrued as earned, except non-accrual
loans on which interest is normally discontinued whenever the payment of principal or interest
is considered to be in doubt, generally when the interest becomes 60 days past due. When a
loan is placed on non-accrual, all previously accrued but uncollected interest is reversed
against current period income. In general, subsequent payments received are applied to the
outstanding principal balance of the loan. A loan is returned to accrual status when the
borrower has demonstrated a satisfactory payment trend subject to managements assessment of
the borrowers ability to repay the loan.Loan origination fees and certain direct loan origination costs are deferred and recognized
over the lives of the related loans as an adjustment to yield using a method that approximates
the level-yield method. Calculation of the yield is done on a loan-by-loan basis.
Unamortized fees are recognized in income in the year the related loans are sold or paid off.
Other loan fees and charges representing service costs for the repayment of loans, delinquent
payments or miscellaneous loan services are recorded as income when collected.Discounts and premiums on loans are amortized into interest income, using a method that
approximates the level-yield method over the estimated life of the related loans.
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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 losses inherent in the loan portfolio. 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 consumer loans and residential 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, impairment may be measured based on a loans
observable market price or the fair value of the collateral if the loan is collateral
dependent.Allocation of the allowance for loan losses 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 allocation of the allowance for loan
losses 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 December 31, 2005 is adequate to absorb
losses inherent in the loan portfolio.Servicing- Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Servicing assets are reported in
prepaid expenses and other assets and are amortized into other income in proportion to, and
over the period of, the estimated future net servicing income of the underlying financial
assets. Servicing assets are evaluated for impairment based upon the fair value of the rights
as compared to amortized cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined using prices for
similar assets with similar characteristics, when available, or based upon discounted cash
flows using market-based assumptions. Impairment is recognized through a valuation allowance
for an individual stratum, to the extent that fair value is less than the capitalized amount
for the stratum.Loans serviced for others are not included in the accompanying consolidated balance sheets.
The unpaid principal balances of mortgage and other loans serviced for others were $6.1
million and $5.7 million at December 31, 2005 and 2004, respectively.The balance of servicing assets, net of valuation allowances, included in other assets at
December 31, 2005 and 2004, was $18 and $33, respectively. The fair values of these rights
were $27 and $33, respectively. The fair value of servicing rights was determined using
discount rates ranging from 7.6% to 14.5% and prepayment speeds ranging from 13.8% to 22.4%,
depending upon the stratification of the specific right.
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The following summarizes mortgage servicing rights capitalized and amortized, along with the
aggregate activity in related valuation allowances for the years ended December 31:
 2005
    
    
    2004Beginning balance of servicing assets
    
    $
    295
    
    
    $
    306Mortgage servicing rights amortized
    
    
    (15
    )
    
    
    (11
    )Ending balance of servicing assets
    
    $
    280
    
    
    $
    295Valuation allowances:Balance, beginning of year
    
    $
    262
    
    
    $
    262Additions
    
    
    
    
    
    
    Balance, end of year
    
    $
    262
    
    
    $
    262
 Premises and Equipment- Premises and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are computed on the straight-line method over the
estimated useful lives of the assets. The depreciable lives range from 3 to 25 years for
leasehold improvements, 3 to 20 years for furniture, fixtures and equipment and 15 to 30 years
for the office buildings.The Company reviews its long-lived assets for impairment annually or when events or
circumstances indicate that the carrying amount of these assets may not be recoverable. An
asset is considered impaired when the expected undiscounted cash flows over the remaining
useful life is less than the net book value. When impairment is indicated for an asset, the
amount of impairment loss is the excess of the net book value over its fair value.Real Estate Acquired through Foreclosure- Real estate acquired through foreclosure is carried
at estimated fair value at the time of foreclosure. Any subsequent operating expense or
income, reduction in estimated values, and gains or losses on disposition of such properties
are included in current operations. The Company had no real estate acquired through
foreclosure at December 2005 and 2004.Income Taxes- Deferred tax assets or liabilities shown on the balance sheet are adjusted to
reflect differences between the tax bases of assets and liabilities and their reported amounts
in the financial statements, based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.Investment in Federal Home Loan Bank of San Francisco StockAs a member of the Federal Home
Loan Bank (FHLB) of San Francisco, the Bank is required to own common stock in the FHLB of
San Francisco based upon its balance of residential mortgage loans and outstanding FHLB
advances. FHLB stock is carried at cost and may be sold back to the FHLB at its carrying
value. Both cash and stock dividends received are reported as dividend income.Core Deposit Intangibles- Core deposit intangibles are established in connection with
purchase business combinations of banking or thrift institutions. The intangible asset
represents the fair market value of acquiring the long-term depositor relationship. Core
deposit intangibles have a finite useful life and it is the Companys policy to amortize the
intangible over the estimated useful life of the deposit base acquired, currently 10 years.
At December 31, 2005 and 2004, the gross
balance of core deposit intangibles was $2,429 and $1,937 respectively, and the accumulated
amortization was $1,242 and $1,014, respectively. The amortization expense was $228 and $194
for the years ended December 31, 2005 and 2004, respectively. Estimated future amortization
of core
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deposit intangibles is $252 for December 31, 2006, $233 for December 31, 2007, $148
for December 31, 2008 and $146 for December 31, 2009, and $143 for December 31, 2010.Goodwill Goodwill is no longer amortized, but instead is tested for impairment at least
annually. A goodwill impairment test was completed on September 30, 2005. No impairment loss
was recorded by the Company.Derivatives Held for Asset and Liability Management Purposes- SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value. If certain
conditions are met, a derivative 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 a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation.In accordance with the standards, the Company has identified certain types of short-term
interest-bearing liabilities as a source of interest rate risk to be hedged in connection with
the Companys overall asset-liability management process. Although these liabilities have
contractually fixed rates of interest, their short-term maturities, together with the
expectation that they will be continually refinanced or replaced with similar products, give
rise to the risk of fluctuations in interest expense as interest rates rise and fall in future
periods. In response to this identified risk, the Company uses interest rate swaps as cash
flow hedges to hedge the interest rate risk associated with the cash flows of the specifically
identified short-term liabilities.To qualify for hedge accounting, the Company must show that, at the inception of the hedges
and on an ongoing basis, the changes in the fair value of the hedging instruments are expected
to be highly effective in offsetting related changes in the cash flows of the hedged
liabilities. These interest rate swaps have been shown to be effective in hedging the
exposure to the short-term liability variability in cash flows and, therefore, qualify for
hedge accounting. For our cash flow hedges, the effective portion of the derivatives gain or
loss is initially reported in shareholders equity (as a component of accumulated other
comprehensive income (loss)) and is subsequently reclassified into income, as an increase or
decrease to interest expense, in the same period or periods during which the hedged forecasted
transaction affects income. The ineffective portion of the gain or loss is reported as
interest expense immediately. During the next twelve months, the Company expects a benefit of
$328, net of tax, from the amount recorded in the separate component of stockholders equity
to be reclassified to interest expense.Securities Sold Under Repurchase Agreements The Company sells securities under repurchase
agreements. These transactions are accounted for as collateralized financing transactions and
recorded at the amounts at which the securities were sold. The Company may have to provide
additional collateral to the counterparty, as necessary.Stock-Based Compensation The Company issues stock-based compensation to certain employees,
officers, and Directors. SFAS No. 123, Accounting for Stock-based Compensation, encourages,
but does not require, companies to account for stock-based compensation using the fair value
method, which generally results in compensation expense recognition. As permitted by SFAS No.
123, the Company continues to account for its fixed stock options using the intrinsic-value
method, prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related interpretations, which generally does not result in compensation expense recognition.
Under the intrinsic value method, compensation cost for stock options is measured at the date
of grant as the excess, if any, of the quoted market price of our stock over the exercise
price of the options. Had compensation cost for these plans been determined based on the fair
value at the grant
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dates of options consistent with the method defined in SFAS No. 123, the
Companys net income and earnings per share would have been reduced to the pro forma amounts
indicated below for the years ended December 31, 2005, 2004 and 2003:
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Dollars in thousands, except per share dataNet income, as reported
    
    $
    8,336
    
    
    $
    8,209
    
    
    $
    7,413Deduct:Total stock-based
compensation expense
determined under the fair
value based method for all
awards, net of related tax
effect
    
    
    236
    
    
    
    151
    
    
    
    79Pro forma net income
    
    $
    8,100
    
    
    $
    8,058
    
    
    $
    7,334Earnings per share:Basic earnings per share:As reported
    
    $
    1.56
    
    
    $
    1.56
    
    
    $
    1.43Pro forma
    
    $
    1.51
    
    
    $
    1.46
    
    
    $
    1.41Diluted earnings per share:As reported
    
    $
    1.48
    
    
    $
    1.46
    
    
    $
    1.36Pro forma
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    1.35
 93




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Year Ended December 31,2005
    
    2004
    
    2003Risk-free interest rate
    
    
    4.32
    %
    
    
    4.07
    %
    
    
    3.94
    %Expected volatility
    
    
    49.80
    %
    
    
    36.37
    %
    
    
    29.03
    %Expected lives
    
    9 years
    
    9 years
    
    9 yearsContractual lives
    
    10 years
    
    10 years
    
    10 yearsDividend Yield
    
    
    1.92
    %
    
    
    2.18
    %
    
    
    2.92
    %
 Recent Accounting Pronouncements 
 Accounting for Certain Loans or Debt
Securities Acquired in a Transfer
 Share-Based Payment Accounting for Stock Issued to
Employees, Accounting for Stock-Based Compensation
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##### Table of Contents



Accounting Changes and Error Corrections
 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
 Terms of
Loan Products That May Give Rise to a Concentration of Credit Risk Disclosures about
Fair Value of Financial Instruments
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provided for all periods presented. The adoption of this FSP did not have a significant
impact on the Companys consolidated financial statements.Reclassifications- Certain reclassifications have been made to the prior financial statements
to conform to the current year presentation.Stock Split The accompanying consolidated financial statements of the Company reflect the 6
for 5 stock split in the form of a stock dividend paid on March 11, 2004 to holders of record
on February 25, 2004. Fractional shares distributed in connection with this stock dividend
were paid in cash based on the closing market price on the record date. All share and per
share information herein has been retroactively restated to reflect this stock split. The
accompanying consolidated financial statements also reflect an increase in its authorized
capital shares from 3,000,000 to 12,000,000, which occurred contemporaneously with the stock
split. Of the 12,000,000 shares authorized, 1,200,000 shares are reserved for preferred
stock.2.
    
    LOANS RECEIVABLEThe Banks loan portfolio as of December 31 is summarized as follows:
 2005
    
    
    2004Real estate loans:Residential property  one to four units
    
    $
    115,925
    
    
    $
    100,485Residential property  more than four units
    
    
    80,855
    
    
    
    84,937Residential property  construction
    
    
    50,590
    
    
    
    22,379Nonresidential property  construction
    
    
    20,293
    
    
    
    12,602Commercial and other income  producing properties
    
    
    253,208
    
    
    
    260,759Loans for the acquisition and development of land
    
    
    36,085
    
    
    
    27,460Total real estate loans
    
    
    556,956
    
    
    
    508,622Commercial and industrial loans
    
    
    96,566
    
    
    
    72,240Consumer loans
    
    
    26,653
    
    
    
    23,757Loans collateralized by deposit accounts
    
    
    1,070
    
    
    
    864Consumer line-of-credit loans
    
    
    201
    
    
    
    180681,446
    
    
    
    605,663Net deferred loan fees
    
    
    (2,498
    )
    
    
    (1,730
    )Net (discount) premiums
    
    
    (397
    )
    
    
    (263
    )Allowance for loan losses
    
    
    (5,661
    )
    
    
    (5,228
    )Loans receivable, net
    
    $
    672,890
    
    
    $
    598,442
 The Banks lending is concentrated in Californias Central Coast, Kansas City and the
Scottsdale, Arizona metropolitan area. A deterioration in the economic conditions of these
markets could adversely affect its business, financial condition and profitability. Such
deterioration could give rise to increased loan delinquencies, increased problem asset and
foreclosures, decreased loan demand and a decline in real estate values.A downturn in the real estate market may adversely affect our business. As of December 31,
2005, approximately 83.8% of the book value of our loan portfolio consisted of loans secured
by various
types of real estate. Approximately 68.1% of our real property collateral is located in
California, approximately 17.4% is located in the Kansas City metropolitan area, and 14.5% is
in the Arizona market.
 96




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Balance, beginning of year
    
    $
    5,228
    
    
    $
    4,587
    
    
    $
    3,797Charge-offs
    
    
    (2
    )
    
    
    (9
    )
    
    
    Recoveries
    
    
    
    
    
    
    
    
    
    
    Provision for loan losses
    
    
    435
    
    
    
    650
    
    
    
    790Balance, end of year
    
    $
    5,661
    
    
    $
    5,228
    
    
    $
    4,587
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2005
    
    
    2004Impaired loans with a valuation allowance
    
    $
    1,549
    
    
    $
    Impaired loans without a valuation allowance
    
    
    
    
    
    
    157Total impaired loans
    
    
    1,549
    
    
    
    157Valuation allowance related to impaired loans
    
    $
    441
    
    
    $
    
 Year ended December 31,2005
    
    2004
    
    2003Average recorded investment in impaired loans
    
    $
    853
    
    
    $
    440
    
    
    $
    596Interest income recognized on impaired loans
    
    
    
    
    
    
    14
    
    
    
    44Interest income recognized on a cash basis
    
    
    
    
    
    
    14
    
    
    
    44
   Unfunded Loan Commitments as of December 31,
(In Thousands)
 2005
    
    
    2004Commercial lines of credit
    
    $
    40,139
    
    
    $
    26,146Consumer lines of credit
    
    
    46,423
    
    
    
    35,898Undisbursed portion of loans in process
    
    
    78,306
    
    
    
    44,642Approved but, not funded mortgage
loans
    
    
    6,531
    
    
    
    19,735Approved but, not funded commercial
loans
    
    
    8,292
    
    
    
    1,790Approved but not funded consumer
loans
    
    
    1,080
    
    
    
    1,158Letters of credit
    
    
    4,560
    
    
    
    1,439Total commitments
    
    $
    185,331
    
    
    $
    130,808
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3. SECURITIES
  Securities Available for Sale:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage-backed securities  pass throughs
    
    $
    125,153
    
    
    $
    126
    
    
    $
    (2,439
    )
    
    $
    122,840Collateralized mortgage obligations
    
    
    80,470
    
    
    
    25
    
    
    
    (964
    )
    
    
    79,531Commercial mortgage-backed securities
    
    
    40,647
    
    
    
    
    
    
    
    (468
    )
    
    
    40,179Asset-backed securities (underlying securities mortgages)
    
    
    141,086
    
    
    
    659
    
    
    
    (181
    )
    
    
    141,564Asset-backed securities
    
    
    3,335
    
    
    
    52
    
    
    
    (149
    )
    
    
    3,238Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    390,691
    
    
    $
    862
    
    
    $
    (4,201
    )
    
    $
    387,352
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage-backed securities  pass throughs
    
    $
    114,365
    
    
    $
    294
    
    
    $
    (957
    )
    
    $
    113,702Collateralized mortgage obligations
    
    
    73,894
    
    
    
    
    
    
    
    (495
    )
    
    
    73,399Commercial mortgage-backed securities
    
    
    47,545
    
    
    
    472
    
    
    
    (96
    )
    
    
    47,921Asset-backed securities (underlying securities mortgages)
    
    
    187,949
    
    
    
    1,504
    
    
    
    (64
    )
    
    
    189,389Asset-backed securities
    
    
    5,460
    
    
    
    34
    
    
    
    (351
    )
    
    
    5,143Corporate debt securities
    
    
    1,569
    
    
    
    83
    
    
    
    
    
    
    
    1,652$
    430,782
    
    
    $
    2,387
    
    
    $
    (1,963
    )
    
    $
    431,206
  99




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Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2005
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed securities -
pass throughs
    
    $
    55,827
    
    
    $
    (684
    )
    
    $
    55,881
    
    
    $
    (1,755
    )
    
    $
    111,708
    
    
    $
    (2,439
    )Collateralized mortgage obligations
    
    
    29,370
    
    
    
    (175
    )
    
    
    26,270
    
    
    
    (789
    )
    
    
    55,640
    
    
    $
    (964
    )Commercial mortgage-backed
securities
    
    
    33,517
    
    
    
    (332
    )
    
    
    6,662
    
    
    
    (136
    )
    
    
    40,179
    
    
    $
    (468
    )Asset-backed securities -
(underlying securities mortgages)
    
    
    25,237
    
    
    
    (136
    )
    
    
    2,923
    
    
    
    (45
    )
    
    
    28,160
    
    
    $
    (181
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    2,433
    
    
    
    (149
    )
    
    
    2,433
    
    
    $
    (149
    )$
    143,951
    
    
    $
    (1,327
    )
    
    $
    94,169
    
    
    $
    (2,874
    )
    
    $
    238,120
    
    
    $
    (4,201
    )
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2004
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed securities -
pass throughs
    
    $
    54,582
    
    
    $
    (350
    )
    
    $
    29,319
    
    
    $
    (607
    )
    
    $
    83,901
    
    
    $
    (957
    )Collateralized mortgage obligations
    
    
    61,773
    
    
    
    (271
    )
    
    
    11,626
    
    
    
    (224
    )
    
    
    73,399
    
    
    
    (495
    )Commercial mortgage-backed
securities
    
    
    7,090
    
    
    
    (70
    )
    
    
    832
    
    
    
    (26
    )
    
    
    7,922
    
    
    
    (96
    )Asset-backed securities -
(underlying securities mortgages)
    
    
    18,711
    
    
    
    (64
    )
    
    
    1,302
    
    
    
    
    
    
    
    20,013
    
    
    
    (64
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    4,216
    
    
    
    (351
    )
    
    
    4,216
    
    
    
    (351
    )$
    142,156
    
    
    $
    (755
    )
    
    $
    47,295
    
    
    $
    (1,208
    )
    
    $
    189,451
    
    
    $
    (1,963
    )
   100




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101




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Amortized
    
    
    FairCost
    
    
    ValueMortgage-backed securities  pass throughsDue from one to five years
    
    $
    1,674
    
    
    $
    1,634Due from five to ten years
    
    
    3,617
    
    
    
    3,638Due over ten years
    
    
    119,862
    
    
    
    117,568Total mortgage backed securities  pass throughs
    
    
    125,153
    
    
    
    122,840Collateralized mortgage obligationsDue over ten years
    
    
    80,470
    
    
    
    79,531Total collateralized mortgage obligations
    
    
    80,470
    
    
    
    79,531Commercial mortgage-backed securitiesDue over ten years
    
    
    40,647
    
    
    
    40,179Total commercial mortgage-back securities
    
    
    40,647
    
    
    
    40,179Asset-backed securities (underlying securities
mortgages)Due over ten years
    
    
    141,086
    
    
    
    141,564Total asset backed-securities
    
    
    141,086
    
    
    
    141,564Asset-backed securitiesDue from five to ten years
    
    
    3,335
    
    
    
    3,238Total asset backed-securities
    
    
    3,335
    
    
    
    3,238Total
    
    $
    390,691
    
    
    $
    387,352
 102




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFNMA pass-through securities
    
    $
    80
    
    
    $
    4
    
    
    $
    
    
    
    $
    84
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFNMA pass-through securities
    
    $
    93
    
    
    $
    6
    
    
    $
    
    
    
    $
    99
  Amortized
    
    
    FairCost
    
    
    ValueMortgage-backed securities  FNMA pass-throughsDue from five to ten years
    
    $
    77
    
    
    $
    80Due over 10 years
    
    
    3
    
    
    
    4Total
    
    $
    80
    
    
    $
    84
 103




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##### Table of Contents



4. PREMISES AND EQUIPMENT
  DepreciableLives (years)
    
    
    2005
    
    
    2004Land
    
    
    
    
    
    $
    1,811
    
    
    $
    1,281Office building/REI
    
    
    15-30
    
    
    
    4,091
    
    
    
    3,224Leasehold improvements
    
    
    3 to 25
    
    
    
    3,088
    
    
    
    3,512Furniture, fixtures and equipment
    
    
    3 to 20
    
    
    
    6,303
    
    
    
    5,883Total
    
    
    
    
    
    
    15,293
    
    
    
    13,900Less: accumulated depreciation and amortization
    
    
    
    
    
    
    5,017
    
    
    
    4,764Premises and equipment, net
    
    
    
    
    
    $
    10,276
    
    
    $
    9,136
 5. DEPOSITS
  2005
    
    
    2004Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageAmount
    
    
    Interest Rate (1)
    
    
    Amount
    
    
    Interest Rate(1)Noninterest bearing:Noninterest bearing
    
    $
    14,590
    
    
    
    
    
    
    $
    22,235
    
    
    
    Commercial noninterest bearing
    
    
    35,342
    
    
    
    
    
    
    
    11,395
    
    
    
    Total noninterest bearing
    
    
    49,932
    
    
    
    
    
    
    
    33,630
    
    
    
    Interest bearing:Passbook
    
    
    21,924
    
    
    
    0.88
    %
    
    
    22,324
    
    
    
    0.53
    %NOW accounts
    
    
    34,973
    
    
    
    0.40
    %
    
    
    33,876
    
    
    
    0.06
    %Money Market
    
    
    69,291
    
    
    
    2.85
    %
    
    
    75,743
    
    
    
    1.64
    %Commercial Money Market
    
    
    10,813
    
    
    
    1.55
    %
    
    
    8,567
    
    
    
    1.07
    %Total interest bearing
    
    
    137,001
    
    
    
    1.81
    %
    
    
    140,510
    
    
    
    1.05
    %Total
    
    
    186,933
    
    
    
    1.33
    %
    
    
    174,140
    
    
    
    0.85
    %Certificates of deposits:$100,000 or greater
    
    
    244,468
    
    
    
    3.68
    %
    
    
    220,685
    
    
    
    2.37
    %Under $100,000
    
    
    237,744
    
    
    
    3.63
    %
    
    
    203,357
    
    
    
    2.42
    %Total certificates of deposits
    
    
    482,212
    
    
    
    
    
    
    
    424,042Total deposits
    
    $
    669,145
    
    
    
    3.00
    %
    
    $
    598,182
    
    
    
    1.93
    %
 
 (1)
    
    Weighted Average interest rate as of the end of the period. 104




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$100,000 or
    
    
    Less thanDecember 31
    
    Greater
    
    
    $100,000
    
    
    Total2006
    
    $
    229,797
    
    
    $
    220,308
    
    
    $
    450,1052007
    
    
    6,990
    
    
    
    8,272
    
    
    
    15,2622008
    
    
    3,090
    
    
    
    3,281
    
    
    
    6,3712009
    
    
    3,192
    
    
    
    3,971
    
    
    
    7,1632010 and beyond
    
    
    1,399
    
    
    
    1,912
    
    
    
    3,311$
    244,468
    
    
    $
    237,744
    
    
    $
    482,212
 6. FEDERAL HOME LOAN BANK ADVANCES
    20052006
    
    $
    300,0002010
    
    
    19,000$
    319,000
 At or For the Year EndedDecember 31,2005
    
    2004
    
    2003(Dollars in Thousands)Overnight FHLB advances:Average balance outstanding during the year
    
    $
    295,116
    
    
    $
    263,898
    
    
    $
    190,392Maximum amount outstanding at any
month-end during the period
    
    
    339,050
    
    
    
    298,000
    
    
    
    242,500Balance outstanding at end of period
    
    
    300,000
    
    
    
    297,000
    
    
    
    242,500Average interest rate during the period
    
    
    3.26
    %
    
    
    1.46
    %
    
    
    1.22
    %Average interest rate at end of period
    
    
    4.03
    %
    
    
    2.22
    %
    
    
    .96
    %
 105




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7. NOTE PAYABLE
    8. SUBORDINATED DEBT
   106




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9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
   10. INCOME TAXES
  2005
    
    
    2004
    
    
    2003Current tax expense:Federal
    
    $
    3,062
    
    
    $
    3,737
    
    
    $
    4,799State
    
    
    1,095
    
    
    
    918
    
    
    
    1,3934,157
    
    
    
    4,655
    
    
    
    6,192Deferred tax expense (benefit):Federal
    
    
    937
    
    
    
    606
    
    
    
    (663
    )State
    
    
    86
    
    
    
    175
    
    
    
    (280
    )1,023
    
    
    
    781
    
    
    
    (943
    )$
    5,180
    
    
    $
    5,436
    
    
    $
    5,249
 107




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Federal income taxes at statutory rates
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase resulting from:State tax, net of federal benefit
    
    
    5.7
    
    
    
    5.2
    
    
    
    5.7Other, net
    
    
    (2.4
    )
    
    
    (0.4
    )
    
    
    0.838.3
    %
    
    
    39.8
    %
    
    
    41.5
    %
  2005
    
    
    2004Deferred tax asset:Unrealized hedging loss on cash flow hedges
    
    $
    74
    
    
    $
    1,719Unrealized loss on available for sale securities
    
    
    1,321
    
    
    
    Allowance for loan losses
    
    
    2,434
    
    
    
    2,237State tax
    
    
    405
    
    
    
    432Core deposit intangible
    
    
    
    
    
    
    83Deferred rent
    
    
    91
    
    
    
    Depreciation
    
    
    
    
    
    
    89Gross deferred tax asset
    
    
    4,325
    
    
    
    4,560Deferred tax liabilities:Net loan fees/costs
    
    
    2,166
    
    
    
    1,829FHLB stock dividends
    
    
    1,308
    
    
    
    998Depreciation
    
    
    492
    
    
    
    Unrealized gain on available for sale securities
    
    
    
    
    
    
    171Other
    
    
    222
    
    
    
    248Gross deferred tax liability
    
    
    4,188
    
    
    
    3,246Net deferred tax asset
    
    $
    137
    
    
    $
    1,314
 108




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11. STOCKHOLDERS EQUITY
  Qualified Stock Option Plan
   2005 Equity Based Compensation Plan 
  109




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##### Table of Contents




    
    the 2005 Plan authorizes the granting of:
 
 
    
    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.
  110




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2005
    
    
    2004
    
    
    2003Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceIncentive stock options:Outstanding, beginning of year
    
    
    678,125
    
    
    $
    9.27
    
    
    
    572,730
    
    
    $
    6.88
    
    
    
    508,590
    
    
    $
    6.46Granted
    
    
    9,750
    
    
    $
    17.41
    
    
    
    181,250
    
    
    $
    15.98
    
    
    
    76,740
    
    
    $
    9.40Expired unexercised
    
    
    (12,470
    )
    
    $
    11.68
    
    
    
    (3,030
    )
    
    $
    12.78Options exercised
    
    
    (54,965
    )
    
    $
    7.03
    
    
    
    (72,825
    )
    
    $
    7.03
    
    
    
    (12,600
    )
    
    $
    5.52Outstanding, end of year
    
    
    620,440
    
    
    $
    9.77
    
    
    
    678,125
    
    
    $
    9.27
    
    
    
    572,730
    
    
    $
    6.88Stock options granted to SBA
    
    
    50,944
    
    
    $
    4.86
    
    
    
    50,944
    
    
    $
    4.86
    
    
    
    50,944
    
    
    $
    4.86SBA Stock options exercised
    
    
    (50,944
    )
    
    $
    4.86
    
    
    
    
    
    
    $
    4.86
    
    
    
    
    
    
    $
    4.86Outstanding, end of year
    
    
    620,440
    
    
    $
    9.60
    
    
    
    729,069
    
    
    $
    8.95
    
    
    
    623,674
    
    
    $
    6.71Exercisable, end of year
    
    
    438,932
    
    
    $
    7.63
    
    
    
    458,913
    
    
    $
    6.29
    
    
    
    401,400
    
    
    $
    6.17
  Options Outstanding
    
    
    Options ExercisableRange of
    
    
    
    
    
    RemainingExercise
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    Options
    
    
    Life (years)
    
    
    Price
    
    
    Options
    
    
    Price$4.86
    
    
    44,800
    
    
    
    0.5
    
    
    $
    4.86
    
    
    
    44,800
    
    
    $
    4.86$5.69
    
    
    82,800
    
    
    
    1.5
    
    
    $
    5.69
    
    
    
    82,800
    
    
    $
    5.69$6.94
    
    
    195,570
    
    
    
    3.9
    
    
    $
    6.94
    
    
    
    195,570
    
    
    $
    6.94$7.78
    
    
    50,760
    
    
    
    6.0
    
    
    $
    7.78
    
    
    
    37,732
    
    
    $
    7.78$8.75
    
    
    7,200
    
    
    
    6.5
    
    
    $
    8.75
    
    
    
    5,400
    
    
    $
    8.75$9.38
    
    
    56,310
    
    
    
    7.0
    
    
    $
    9.38
    
    
    
    28,050
    
    
    $
    9.38$9.58
    
    
    4,800
    
    
    
    7.1
    
    
    $
    9.58
    
    
    
    2,400
    
    
    $
    9.58$10.22
    
    
    900
    
    
    
    7.5
    
    
    $
    10.22
    
    
    
    300
    
    
    $
    10.22$13.68
    
    
    75,600
    
    
    
    8.0
    
    
    $
    13.68
    
    
    
    18,900
    
    
    $
    13.68$15.98
    
    
    1,200
    
    
    
    8.2
    
    
    $
    15.98
    
    
    
    300
    
    
    $
    15.98$16.72
    
    
    1,000
    
    
    
    9.3
    
    
    $
    16.72
    
    
    
    0$16.75
    
    
    2,000
    
    
    
    9.2
    
    
    $
    16.75
    
    
    
    0$16.85
    
    
    2,000
    
    
    
    9.8
    
    
    $
    16.85
    
    
    
    0$16.88
    
    
    1,000
    
    
    
    9.8
    
    
    $
    16.88
    
    
    
    0$16.95
    
    
    2,000
    
    
    
    8.2
    
    
    $
    16.95
    
    
    
    500
    
    
    $
    16.95$17.31
    
    
    750
    
    
    
    9.2
    
    
    $
    17.31
    
    
    
    0$18.18
    
    
    88,750
    
    
    
    9.0
    
    
    $
    18.18
    
    
    
    22,180
    
    
    $
    18.18$18.28
    
    
    1,000
    
    
    
    9.1
    
    
    $
    18.28
    
    
    
    0$19.10
    
    
    2,000
    
    
    
    9.0
    
    
    $
    19.10
    
    
    
    0Total
    
    
    620,440
    
    
    
    5.2
    
    
    $
    9.60
    
    
    
    438,932
    
    
    $
    7.63
 111




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12. REGULATORY CAPITAL REQUIREMENTS
       112




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REGULATORY CAPITAL
FINANCIAL STATEMENT FOOTNOTE
 To Be WellCapitalized UnderFor Capital
    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Actions ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    
    
    
    
    Ratio
    
    
    Amount
    
    
    
    
    
    
    RatioAs of December 31, 2005:Total Capital(to risk weighted assets)
    
    $
    82,594
    
    
    
    10.69
    %
    
    $
    61,784
    
    
    
    >
    
    
    
    8.00
    %
    
    $
    77,230
    
    
    
    >
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    76,933
    
    
    
    6.78
    %
    
    
    45,361
    
    
    
    >
    
    
    
    4.00
    %
    
    
    56,702
    
    
    
    >
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    76,933
    
    
    
    6.78
    %
    
    
    17,010
    
    
    
    >
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    76,933
    
    
    
    9.96
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    46,338
    
    
    
    >
    
    
    
    6.00
    %As of December 31, 2004:Total Capital(to risk weighted assets)
    
    $
    77,015
    
    
    
    11.13
    %
    
    $
    55,359
    
    
    
    >
    
    
    
    8.00
    %
    
    $
    69,199
    
    
    
    >
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    71,787
    
    
    
    6.68
    %
    
    
    42,977
    
    
    
    >
    
    
    
    4.00
    %
    
    
    53,721
    
    
    
    >
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    71,787
    
    
    
    6.68
    %
    
    
    16,116
    
    
    
    >
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    71,787
    
    
    
    10.37
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    41,519
    
    
    
    >
    
    
    
    6.00
    %
 113




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13. EARNINGS PER SHARE
  Year Ended December 31, 2005Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    8,336
    
    
    
    5,347,757
    
    
    $
    1.56Effect of dilutive stock options
    
    
    
    
    
    
    272,799
    
    
    
    (0.08
    )Diluted EPS
    
    $
    8,336
    
    
    
    5,620,556
    
    
    $
    1.48
 Year Ended December 31, 2004Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    8,209
    
    
    
    5,256,030
    
    
    $
    1.56Effect of dilutive stock options
    
    
    
    
    
    
    347,650
    
    
    
    (0.10
    )Diluted EPS
    
    $
    8,209
    
    
    
    5,603,680
    
    
    $
    1.46
 Year Ended December 31, 2003Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    7,413
    
    
    
    5,197,008
    
    
    $
    1.43Effect of dilutive stock options
    
    
    
    
    
    
    257,994
    
    
    
    (0.07
    )Diluted EPS
    
    $
    7,413
    
    
    
    5,455,002
    
    
    $
    1.36
 14. COMMITMENTS AND CONTINGENCIES
  2006
    
    $
    1,2952007
    
    
    1,3092008
    
    
    1,3242009
    
    
    1,3392010
    
    
    1,3542011 and thereafter
    
    
    14,543$
    21,164
   114




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15. TRADING ACCOUNT ASSETS
 Derivative Instruments Not Receiving Hedge Treatment
 Interest rate swaps
 115




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Contract or
    
    
    Estimated
    
    
    Weighted AverageNotional
    
    
    Fair Value
    
    
    Interest RateAmount
    
    
    Asset
    
    
    Liability
    
    
    Payable
    
    Receivable2005Total return swaps  receive total
return
CMBS     investment grade total return,
    
    $
    50,000
    
    
    $
    116
    
    
    
    
    
    
    Bank receives the
spread on Lehman Brothers
AAA CMBS Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total return
on CMBS     investment grade total
return
    
    $
    25,000
    
    
    $
    76
    
    
    
    
    
    
    Bank receives the
spread on Banc of America
BAS CMBS AAA Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total return
on CMBS     investment grade total return
    
    $
    9,000
    
    
    $
    6
    
    
    
    
    
    
    Bank
receives the
spread on Banc of America
BAS CMBS AA Index Plus a
spread and receives or
pays the market value
change of index.Total return swaps  receive total
return
on CMBS     investment grade total return
    
    $
    15,000
    
    
    
    
    
    
    $
    (58
    )
    
    Bank
receives
the
spread on Banc of America
BAS CMBS BBB Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total
return
on one month     LIBOR-based ABS
securities
    
    $
    30,000
    
    
    
    
    
    
    $
    (12
    )
    
    Bank
receives
the
spread
on five specific
AA floating ABS
securities plus a spread
of 3 basis points and
receives or pays the
market value change at
maturity.2004Total return swaps  receive total
return
CMBS      investment grade total return,
pay LIBOR
    
    $
    95,000
    
    
    $
    32
    
    
    $
    18
    
    
    Bank
receives the
spread
on Lehman Brothers
AAA CMBS Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total return
on one month      LIBOR based ABS
securities
    
    $
    25,000
    
    
    $
    63
    
    
    $
    0
    
    
    Bank receives the
spread on five specific
-A ABS securities plus a
spread of 12 basis points
and receives or pays the
market value change at
maturity.
 116




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117




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##### Table of Contents



IncomeRealized
    
    
    Unrealized
    
    
    fromGains
    
    
    Gains
    
    
    Trading(Losses)
    
    
    (Losses)
    
    
    AssetsDecember 31, 2005Interest rate contracts:Swaps
    
    $
    24
    
    
    $
    50
    
    
    $
    74MBS and other trading assets
    
    
    4
    
    
    
    (75
    )
    
    
    (71
    )Total trading portfolio
    
    $
    28
    
    
    $
    (25
    )
    
    $
    3December 31, 2004Interest rate contracts:Swaps
    
    $
    674
    
    
    $
    (71
    )
    
    $
    603MBS and other trading assets
    
    
    1
    
    
    
    (31
    )
    
    
    (30
    )Total trading portfolio
    
    $
    675
    
    
    $
    (102
    )
    
    $
    573December 31, 2003Interest rate contracts:Swaps
    
    $
    1,009
    
    
    $
    182
    
    
    $
    1,191MBS and other trading assets
    
    
    0
    
    
    
    (32
    )
    
    
    (32
    )Total trading portfolio
    
    $
    1,009
    
    
    $
    150
    
    
    $
    1,159
 118




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The following table shows the Companys trading securities included in trading account
assets as of December 31:Securities Held for Trading:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2005Mortgage-backed securities and other -
    
    $
    324
    
    
    $
    1
    
    
    $
    (2
    )
    
    $
    323Mutual funds
    
    
    522
    
    
    
    2
    
    
    
    
    
    
    
    524CMBS total return swaps
    
    
    
    
    
    
    198
    
    
    
    (70
    )
    
    
    128Trading assets
    
    $
    846
    
    
    $
    201
    
    
    $
    (72
    )
    
    $
    975
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004Mortgage-backed securities and other -
    
    $
    383
    
    
    $
    6
    
    
    $
    (1
    )
    
    $
    388Mutual funds
    
    
    560
    
    
    
    21
    
    
    
    
    
    
    
    581CMBS total return swaps
    
    
    
    
    
    
    95
    
    
    
    (18
    )
    
    
    77Trading assets
    
    $
    943
    
    
    $
    122
    
    
    $
    (19
    )
    
    $
    1,046
 16. DERIVATIVES HELD FOR ASSET AND LIABILITY MANAGEMENT
 At December 31, 2005, the swaps listed below are hedging the interest rate risk of cash flows
associated with short-term FHLB advances and certificates of deposit with terms between six
and twelve months. These swaps qualify as cash flow hedges. During 2005, 2004 and 2003, the
ineffective portion of the change in fair value of the cash flow hedges was ($6), $155, and
$72, respectively. The fair values for the cash flow swaps in a gain position are reported in
Other assets, those in a loss position are reported in Other liabilities. No significant cash
flow hedges were discontinued during fiscal years 2005, 2004 or 2003.
 Contract or
    
    
    
    
    
    
    Weighted-AverageNotional
    
    
    Estimated
    
    
    Interest RateAmount
    
    
    Fair Value
    
    
    Receivable
    
    
    PayableDecember 31, 2005 -Interest rate swaps  pay fixed
    
    $
    152,000
    
    
    $
    33
    
    
    
    4.39
    %
    
    
    4.42
    %receive 3-month LIBORDecember 31, 2004 -Interest rate swaps  pay fixed
    
    $
    152,000
    
    
    $
    (4,134
    )
    
    
    2.35
    %
    
    
    4.42
    %receive 3-month LIBOR
 119




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The following table sets forth the maturity distribution and weighted-average interest rates
of the interest rate swaps used to limit the repricing risk of deposits and short-term
borrowings as of December 31, 2005:
 Maturities
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    23,000
    
    
    $
    52,000
    
    
    $
    4,000
    
    
    $
    25,000
    
    
    $
    48,000Weighted-average
payable rate
    
    
    2.92
    %
    
    
    3.80
    %
    
    
    3.78
    %
    
    
    5.77
    %
    
    
    5.15
    %Weighted-average
receivable rate
    
    
    4.42
    %
    
    
    4.41
    %
    
    
    4.18
    %
    
    
    4.41
    %
    
    
    4.36
    %
 The Bank is dedicated to managing credit risks associated with investment and interest
rate risk management activities. The Bank maintains positions with a variety of
counterparties or obligors (counterparties). To limit credit exposure arising from such
transactions, the Bank evaluates the credit standing of counterparties, establishes limits for
the total exposure to any one counterparty, monitors exposure against the established limits,
and monitors investment portfolio composition to manage concentrations.The Bank pledges certain mortgage-backed securities as collateral for our interest rate swaps.
 17. FAIR VALUES OF FINANCIAL INSTRUMENTS
 SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company
disclose estimated fair values for its financial instruments. The estimated fair value
amounts have been determined by the Company using available market information and appropriate
valuation methodologies; however, considerable judgment is required to interpret market data
to develop estimates of fair value.
 120




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##### Table of Contents



Accordingly, the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair value amounts
at December 31:
 2005
    
    
    2004Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    19,312
    
    
    $
    19,312
    
    
    $
    13,238
    
    
    $
    13,238Trading account assets
    
    
    975
    
    
    
    975
    
    
    
    1,046
    
    
    
    1,046Securities, available for sale
    
    
    387,352
    
    
    
    387,352
    
    
    
    431,206
    
    
    
    431,206Securities, held to maturity
    
    
    80
    
    
    
    84
    
    
    
    93
    
    
    
    99Loans receivable, net
    
    
    672,890
    
    
    
    675,326
    
    
    
    598,442
    
    
    
    615,198FHLB stock
    
    
    16,364
    
    
    
    16,364
    
    
    
    15,134
    
    
    
    15,134Accrued interest receivable
    
    
    4,463
    
    
    
    4,463
    
    
    
    3,322
    
    
    
    3,322Liabilities:Demand deposits
    
    
    186,933
    
    
    
    186,933
    
    
    
    174,140
    
    
    
    174,140Certificates of deposits
    
    
    482,212
    
    
    
    479,443
    
    
    
    424,042
    
    
    
    423,364FHLB advances
    
    
    319,000
    
    
    
    318,359
    
    
    
    316,000
    
    
    
    317,043Securities sold under
repurchase agreements
    
    
    59,013
    
    
    
    58,894
    
    
    
    79,689
    
    
    
    79,952Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Due to broker
    
    
    2,474
    
    
    
    2,474
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    914
    
    
    
    914
    
    
    
    765
    
    
    
    765Hedging Instruments -
Interest rate swaps
    
    
    33
    
    
    
    33
    
    
    
    (4,134
    )
    
    
    (4,134
    )
 The methods and assumptions used to estimate the fair value of each class of financial
instrument for which it is practicable to estimate that value are explained below:
 Cash and Cash Equivalents- The carrying amounts approximate fair values due to the
short-term nature of these instruments.Trading Account Assets- The fair values of trading securities included in trading account
assets are obtained from market bids or from independent securities brokers or dealers.
Fair values of interest rate contracts are based on quoted market price or dealer quotes.Securities- The fair values of securities are generally obtained from market bids for
similar or identical securities or are obtained from independent security brokers or
dealers.Loans- Fair values are estimated for portfolios of loans with similar financial
characteristics, primarily fixed and adjustable rate interest terms. The fair values of
mortgage loans are based upon discounted cash flows utilizing applicable risk-adjusted
discount rates relative to available mortgage-backed securities having similar rate and
repricing characteristics, as well as anticipated
prepayment schedules. No adjustments have been made for changes in credit within the loan
portfolio. It is managements opinion that the allowance for estimated loan losses
pertaining to performing and nonperforming loans results in a fair valuation of such loans.FHLB Stock- The carrying amounts approximate fair values, as the stock may be sold back to
the FHLB at cost.
 121




---



##### Table of Contents



Accrued Interest Receivable The carrying amount of accrued interest receivable approximates
fair value due to its short-term nature.Deposits- The fair values of deposits are estimated based upon the type of deposit product.
Demand accounts, which include passbooks and transaction accounts, are presumed to have
equal book and fair values, since the interest rates paid on these accounts are based on
prevailing market rates and the amounts are payable upon demand. The estimated fair values
of time deposits are determined by discounting the cash flows of settlements of deposits
having similar maturities and current rates, utilizing a LIBOR swap curve adjusted for
Federal Deposit Insurance Corporation (FDIC) insurance that approximates the prevailing
rates offered on the Companys term borrowings less the cost of FDIC insurance as of the
reporting date.FHLB Advances- The fair values of FHLB advances are based upon discounted cash flows
utilizing applicable risk-adjusted spreads relative to the current pricing for similar
advances.Securities Sold under Repurchase Agreements- The Company has entered into sales of
securities under agreements to repurchase. At December 31, 2005,
$59 million of the securities sold under
repurchase agreements are long-term in nature and the fair value is calculated by
discounting future cash flows based on expected maturities or repricing dates, utilizing
estimated market discount rates at each reporting date. The call features of these
instruments are also considered in the determination of fair values.Subordinated Debt- The carrying amount approximates fair value, as the rate is based on
current market rates.Due to Broker The carrying amount of due to broker approximates fair value due to its
short-term nature.Hedging instrumentsconsist of interest rate swaps used to modify the interest rate
sensitivity of certain short-term certificates of deposit, a portion of the Banks
securities sold under agreements to repurchase and the short-term FHLB advances. Fair
values are based on quoted market prices or dealer quotes. Where such quotes are not
available, fair value is estimated by using quoted market prices for similar securities or
by discounting future cash flows at a risk-adjusted spread to the LIBOR-based swap curve.Commitments to Extend Credit, and Standby and Commercial Letters of Credit- The fair values
of commitments to extend credit and standby letters of credit were not significant at either
December 31, 2005 or 2004, as these instruments predominantly have adjustable terms and are
of a short-term nature.The fair value estimates presented herein are based on pertinent information available to
management as of each reporting date. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the amounts
presented herein.Accrued Interest Payable- The carrying amount of accrued interest payable approximates fair
value due to its short-term nature
 122




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18. RELATED-PARTY TRANSACTIONS
 The Bank has contracted with Smith Breeden Associates (SBA) to provide investment advisory
services and interest rate risk analysis. A principal of SBA is a director for the Company
and the Bank. Several principals and employees of SBA are stockholders of the Company. The
amount of consulting expense relating to SBA for the years ended December 31, 2005, 2004 and
2003 was $425,000, $412,000and $365,000, respectively.In the ordinary course of business, the Bank grants loans to principal officers and directors
and their affiliates. In 2005 and 2004, no new loans were granted. The following table is a
roll-forward of the related party loan activity and outstanding balances on previously granted
loans as of December 31, 2005 and 2004.
 Amounts in thousands
    
    2005
    
    
    2004Beginning balance
    
    $
    5,382
    
    
    $
    7,597Additions
    
    
    
    
    
    
    30Repayments
    
    
    (453
    )
    
    
    (1,195
    )Change in related party status
    
    
    
    
    
    
    (1,050
    )Ending balance
    
    $
    4,929
    
    
    $
    5,382
 19. EMPLOYEE BENEFIT PLAN
 The Company sponsors a defined contribution plan for the benefit of its employees. The
Companys contributions to the plan are determined annually by the Board of Directors in
accordance with plan requirements. For tax purposes, eligible participants may contribute up
to a maximum of 15% of their compensation, not to exceed the dollar limit imposed by the
Internal Revenue Service. The expense associated with the employee benefit plan is included
in salary and employee benefits in the consolidated statements of earnings. For the plan
years ended December 31, 2005, 2004 and 2003, the Company contributed $392,000, $473,000 and
$405,000, respectively.
 123




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20. PARENT COMPANY ONLY FINANCIAL INFORMATION
 Condensed Statements of Financial Condition
 December 31,2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    2,743
    
    
    $
    2,580Trading account assets
    
    
    167
    
    
    
    163Investment in subsidiaries
    
    
    82,446
    
    
    
    75,225Other assets
    
    
    672
    
    
    
    1,029TOTAL
    
    $
    86,028
    
    
    $
    78,997LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Subordinated debt
    
    $
    25,774
    
    
    $
    25,774Accounts payable and other liabilities
    
    
    680
    
    
    
    563Total liabilities
    
    
    26,454
    
    
    
    26,337Stockholders Equity:Preferred stock, $.01 par value; 1,200,000 shares authorized: none issued and outstandingCommon stock, $.01 par value; 10,800,000 shares authorized;
5,384,843 shares issued and outstanding as of December 31,
2005 and 5,278,934 shares as of December 31, 2004
    
    
    54
    
    
    
    53Additional paid-in capital
    
    
    32,059
    
    
    
    31,225Retained earnings
    
    
    29,458
    
    
    
    23,637Accumulated other comprehensive loss, net of tax
    
    
    (1,997
    )
    
    
    (2,255
    )Total stockholders equity
    
    
    59,574
    
    
    
    52,660TOTAL
    
    $
    86,028
    
    
    $
    78,997
 124




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##### Table of Contents



Condensed Statements of Earnings
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Interest income
    
    $
    5
    
    
    $
    23
    
    
    $
    3Interest expense
    
    
    1,559
    
    
    
    822
    
    
    
    500Net interest expense
    
    
    (1,554
    )
    
    
    (799
    )
    
    
    (497
    )Other income (loss)
    
    
    39
    
    
    
    (15
    )
    
    
    56Other expense
    
    
    (1,018
    )
    
    
    (1,002
    )
    
    
    (867
    )Loss before income taxes and equity
in subsidiaries
    
    
    (2,533
    )
    
    
    (1,816
    )
    
    
    (1,308
    )Income tax benefit
    
    
    994
    
    
    
    740
    
    
    
    543Loss before equity in subsidiary
    
    
    (1,539
    )
    
    
    (1,076
    )
    
    
    (765
    )Equity in net earnings of subsidiary
    
    
    9,875
    
    
    
    9,285
    
    
    
    8,178Net income
    
    $
    8,336
    
    
    $
    8,209
    
    
    $
    7,413
 125




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Condensed Statements of Cash Flows
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash Flows from Operating Activities:Net income
    
    $
    8,336
    
    
    $
    8,209
    
    
    $
    7,413Adjustments:Equity in net undistributed earnings of subsidiary
    
    
    (9,875
    )
    
    
    (9,299
    )
    
    
    (8,178
    )(Increase) decrease in unrealized gain in trading
assets
    
    
    (4
    )
    
    
    (17
    )
    
    
    (20
    )Amortization and depreciation
    
    
    23
    
    
    
    (3
    )
    
    
    2(Increase) decrease in other assets
    
    
    346
    
    
    
    11
    
    
    
    47(Decrease) increase in accounts payable and
other liabilities
    
    
    117
    
    
    
    (454
    )
    
    
    16Other
    
    
    
    
    
    
    
    
    
    
    Net cash used in operating activities
    
    
    (1,057
    )
    
    
    (1,553
    )
    
    
    (720
    )Cash Flows from Investing Activities:Net (increase) decrease in investment securities
    
    
    
    
    
    
    714
    
    
    
    (1,471
    )Investment in subsidiary
    
    
    
    
    
    
    (303
    )
    
    
    (460
    )Purchase of furniture, fixtures and equipment
    
    
    
    
    
    
    (99
    )
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    312
    
    
    
    (1,931
    )Cash Flows from Financing Activities:Net proceeds from exercise of stock options
    
    
    835
    
    
    
    516
    
    
    
    69Cash contribution to subsidiary
    
    
    
    
    
    
    (7,400
    )
    
    
    Cash dividends received from Bank
    
    
    2,900
    
    
    
    4,000
    
    
    
    Cash dividends paid
    
    
    (2,515
    )
    
    
    (4,645
    )
    
    
    (1,127
    )Increase/(decrease) in subordinated debt
    
    
    
    
    
    
    10,310
    
    
    
    15,464Repayment of notes payable
    
    
    
    
    
    
    
    
    
    
    (11,300
    )Net cash provided by financing activities
    
    
    1,220
    
    
    
    2,781
    
    
    
    3,106Net (decrease) increase in cash and cash equivalents
    
    
    163
    
    
    
    1,540
    
    
    
    455Cash and cash equivalents, beginning of year
    
    
    2,580
    
    
    
    1,040
    
    
    
    585Cash and cash equivalents, end of year
    
    $
    2,743
    
    
    $
    2,580
    
    
    $
    1,040Supplemental DisclosuresNon-cash investing and financing activities:Dividend in kind
    
    $
    
    
    
    $
    
    
    
    $
    (757
    )
 
 126




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21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 Quarters EndedDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2005Interest income
    
    $
    16,738
    
    
    $
    15,847
    
    
    $
    15,163
    
    
    $
    14,308Interest expense
    
    
    9,186
    
    
    
    8,285
    
    
    
    7,680
    
    
    
    6,747Net interest income
    
    
    7,552
    
    
    
    7,562
    
    
    
    7,483
    
    
    
    7,561Provision for loan losses
    
    
    85
    
    
    
    0
    
    
    
    200
    
    
    
    150Net interest income after provision for
loan loss
    
    
    7,467
    
    
    
    7,562
    
    
    
    7,283
    
    
    
    7,411Noninterest income
    
    
    1,019
    
    
    
    1,241
    
    
    
    1,046
    
    
    
    1,563Noninterest expense
    
    
    5,349
    
    
    
    5,379
    
    
    
    5,138
    
    
    
    5,210Income before provision for income taxes
    
    
    3,137
    
    
    
    3,424
    
    
    
    3,191
    
    
    
    3,764Provision for income taxes
    
    
    1,085
    
    
    
    1,326
    
    
    
    1,240
    
    
    
    1,529Net income
    
    $
    2,052
    
    
    $
    2,098
    
    
    $
    1,951
    
    
    $
    2,235Basic earnings per share
    
    $
    0.38
    
    
    $
    0.39
    
    
    $
    0.36
    
    
    $
    0.42Diluted earnings per share
    
    $
    0.36
    
    
    $
    0.37
    
    
    $
    0.35
    
    
    $
    0.402004Interest income
    
    $
    14,021
    
    
    $
    13,271
    
    
    $
    12,727
    
    
    $
    12,247Interest expense
    
    
    6,432
    
    
    
    5,846
    
    
    
    5,232
    
    
    
    5,208Net interest income
    
    
    7,589
    
    
    
    7,425
    
    
    
    7,495
    
    
    
    7,039Provision for loan losses
    
    
    100
    
    
    
    230
    
    
    
    230
    
    
    
    90Net interest income after provision for
loan loss
    
    
    7,489
    
    
    
    7,195
    
    
    
    7,265
    
    
    
    6,949Noninterest income
    
    
    1,182
    
    
    
    963
    
    
    
    930
    
    
    
    1,088Noninterest expense
    
    
    4,979
    
    
    
    4,828
    
    
    
    4,870
    
    
    
    4,739Income before provision for income taxes
    
    
    3,692
    
    
    
    3,330
    
    
    
    3,325
    
    
    
    3,298Provision for income taxes
    
    
    1,501
    
    
    
    1,351
    
    
    
    1,345
    
    
    
    1,239Net income
    
    $
    2,191
    
    
    $
    1,979
    
    
    $
    1,980
    
    
    $
    2,059Basic earnings per share
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    0.40Diluted earnings per share
    
    $
    0.39
    
    
    $
    0.35
    
    
    $
    0.35
    
    
    $
    0.37
 127




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9a. Controls and Procedures
   
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officer of the Registrant.
   
 Item 11. Executive Compensation.
  128




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
    Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected inand rights
    
    
    and rights
    
    
    column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    569,496
    
    
    $
    9.77
    
    
    
    533,385Equity compensation
plans not approved
by security holders
(1)
    
    
    50,944
    
    
    
    4.86
    
    
    
    Total
    
    
    620,440
    
    
    $
    9.36
    
    
    
    533,385
 
 (1)
    
    During 1996, we granted 180,000 options to Smith Breeden Associates for financial advisory
services provided to us in connection with our acquisition of Los Padres Bank. For further
information regarding these options refer to footnote No. 11 of our Consolidated Financial
Statements in Item 8 hereof. 
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountant Fees and Services
  129




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##### Table of Contents



Part IV
 
 Item 15. Exhibits and Financial Statement Schedules.
   Report of Independent Registered Public Accounting FirmConsolidated Statements of Financial Condition as of December 31, 2005 and 2004.Consolidated Statements of Earnings for the Years Ended December 31, 2005, 2004 and 2003.Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005, 2004
and 2003.Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003.Notes to Consolidated Financial Statements.
   EXHIBIT NO.
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Harrington West Financial Group, Inc. (1)3.1.1
    
    Certificate of Amendment to Certificate of Incorporation. (1)3.1.2
    
    Second Certificate of Amendment to Certificate of Incorporation. (1)3.2
    
    Bylaws of Harrington West Financial Group, Inc. (1)3.2.1
    
    Amendment to Bylaws. (1)4.0
    
    Specimen stock certificate of Harrington West Financial Group, Inc. (1)4.1
    
    Indenture Agreement dated September 25, 2003. (2)4.2
    
    Amended and Restated Declaration of Trust of Harrington West Capital Trust I
dated September 25, 2003 (2)4.3
    
    Preferred Securities Guarantee Agreement dated September 25, 2003 (2)4.4
    
    Indenture Agreement dated September 27, 2004 (2)4.5
    
    Amended and Restated Declaration of Trust of Harrington West Capital Trust II
dated September 27, 2004 (2)4.6
    
    Guarantee Agreement dated September 27, 2004 (2)10.1
    
    Harrington West Financial Group 1996 Stock Option Plan, as amended. (1)10.2
    
    Amended and Restated Credit Agreement dated as of October 30, 1997 among
Harrington West Financial Group, Inc., the lenders party thereto and Harris Trust and
Savings Bank, as amended on October 1, 1999, May 2, 2000 and November 1, 2001. (1)
 130




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##### Table of Contents



EXHIBIT NO.
    
    DESCRIPTION10.2.1
    
    Fourth Amendment to Amended and Restated Credit Agreement dated September 17, 2002. (1)10.2.2
    
    Fifth Amendment to Amended and Restated Credit Agreement dated February 24, 2003. (2)10.2.3
    
    Sixth Amendment to Amended and Restated Credit Agreement dated October 30, 2003. (2)10.2.4
    
    Seventh Amendment to Amended and Restate Credit Agreement dated September 16,
2004.(2)10.3
    
    Investment and Interest Rate Advisory Agreement between Los Padres Savings
Bank, FSB and Smith Breeden Associates, Inc., dated February 3, 1997. (1)10.4
    
    Purchase and Assumption Agreement by and between Los Padres Bank, FSB and
Harrington Bank, FSB dated as of May 30, 2001. (1)10.5
    
    Los Padres Mortgage Company, LLC Operating Agreement by and between Resource
Marketing Group, Inc. and Los Padres Bank FSB dated June 13, 2002. (1)10.6
    
    Option Agreement, dated as of April 4, 1996 by and between Smith Breeden
Associates, Inc. and Harrington West Financial Group, Inc. Assignment of Option, dated
as of January 19, 2001, by and between Craig Cerny and Smith Breeden Associates, Inc.
(1)10.7
    
    Stock Purchase Agreement by and between Harrington Bank, FSB and Los Padres
Bank, FSB dated as of May 30, 2001. (1)10.8
    
    2005 Equity Based Compensation Plan (2)10.9
    
    Smith Breeden Associates, Inc. Portfolio Advisory & Rate Risk Analysis
Agreement (2)11
    
    Statement re computation of per share earnings  Reference is made to Item 8.
Financial Statements and Supplementary Data for the required information.14
    
    Code of Ethics (3)23
    
    Consent of Deloitte and Touche LLP31.1
    
    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.
 
 (1)
    
    Incorporated by reference to the Registrants Form S-1 (File No. 333-99031)
filed with the Securities and Exchange Commission (the SEC) on August 30, 2002, as
amended.(2)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter ending
September 30, 2003 filed with the SEC on November 11, 2003.(3)
    
    Previously filed. 131




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##### Table of Contents



SIGNATURES
  HARRINGTON WEST FINANCIAL GROUP, INC.March 30, 2006
    
    By:
    
    /s/ Craig J. CernyCraig J. CernyChairman of the Boardand Chief Executive OfficerMarch 30, 2006
    
    By:
    
    /s/ William W. Phillips, jr.William W. Phillips, Jr.President, Chief Operating Officer
and Chief Financial Officer
  NAME
    
    TITLE
    
    DATE/s/ Craig J. Cerny

Craig J. Cerny
    
    Chairman of the Board and Chief Executive Officer
    
    March 30, 2006/s/ William W. Phillips

William W. Phillips, Jr.
    
    Director, President, Chief Operating Officer and Chief Financial Officer
    
    March 30, 2006/s/ Stanley J. Kon

Stanley J. Kon
    
    Director
    
    March 30, 2006/s/ John J. McConnell

John J. McConnell
    
    Director
    
    March 30, 2006/s/ Paul O. Halme

Paul O. Halme
    
    Director
    
    March 30, 2006/s/ William D. Ross

William D. Ross
    
    Director
    
    March 30, 2006
 132