##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO 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 
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 610 Alamo Pintado RoadSolvang, California
    
    93463(Address of Principal Executive Offices)
    
    (Zip Code)
 (805) 688-6644
      
 o þ
 o þ
  þ o
 þ
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PagePART I
    
    
    4Item 1. Business
    
    
    5General
    
    
    5Principal Products and ServicesLending Activities
    
    
    8Asset Quality
    
    
    15Investment Activities
    
    
    22Sources of Funds
    
    
    31Subsidiaries
    
    
    34Employees
    
    
    34Regulation of Harrington West Financial Group
    
    
    34Regulation of Los Padres Bank
    
    
    35Legislation
    
    
    41Item 1A. Risk Factors
    
    
    42Item 1B. Unresolved Staff Comments
    
    
    53Item 2. Properties
    
    
    53Item 3. Legal Proceedings
    
    
    55Item 4. Submission of Matters to a Vote of Security Holders
    
    
    55PART II
    
    
    56Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    56Item 6. Selected Financial Data
    
    
    59Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    60Mission
    
    
    60Multiple Market Strategy
    
    
    61Product Line Diversification
    
    
    61Investment Management
    
    
    61Control Banking Risks
    
    
    62Performance Measurement
    
    
    62Profitability Drivers
    
    
    62Strategic Response to Current Operating Environment
    
    
    63HWFGs Response
    
    
    63Critical Accounting Policies
    
    
    65Results of Operation
    
    
    67Changes in Financial Condition
    
    
    73Asset and Liability Management
    
    
    76Liquidity and Capital Resources
    
    
    79Contractual Obligations and Commercial Commitments
    
    
    81Off Balance Sheet Arrangements
    
    
    81Inflation and Changing Prices
    
    
    82Effect of Newly, But Not Yet Effective Accounting Standards
    
    
    82Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    82Item 8. Financial Statements and Supplementary Data
    
    
    82Item 9. Changes in, and Disagreements with, Accountants on Accounting and Financial Disclosure
    
    
    130Item 9A(T). Controls and Procedures
    
    
    130Item 9B. Other Information
    
    
    130PART III
    
    
    131Item 10. Directors, Executive Officers and Corporate Governance
    
    
    131Item 11. Executive Compensation
    
    
    131Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    131Item 13. Certain Relationships, Related Transactions and Director Independence
    
    
    132Item 14. Principal Accountant Fees and Services
    
    
    132PART IV
    
    
    133Item 15. Exhibits, Financial Statement Schedules
    
    
    133SIGNATURES
    
    
    135CERTIFICATIONS
    
    
    136EX-23.1EX-31.1EX-31.2EX-31.3EX-32




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PART I
 Cautionary Statement Regarding Forward-Looking Statements.
  
    
    the current economic crises in the United states and abroad, and the response to
government and banking regulators thereto;
    
    we may experience higher defaults on our loan portfolio than we expect;
    
    changes in the level on non-performing assets and charge-offs
    
    changes in managements estimate of the adequacy of the allowance for loan losses;
    
    changes in managements valuation of our mortgage-backed swaps and related
securities portfolio and interest rate contracts;
    
    increases in competitive pressure among financial institutions;
    
    economic conditions may deteriorate further, 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 income may be lower or net loss may be greater than expected from the Banks
operations;
    
    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 and our ability to
execute on our capital plans;
    
    changes in the interest rate environment and their impact on customer behavior, our
interest margins and our securities portfolio;
    
    political and global changes arising from the war on terrorism;
    
    the impact of re-pricing 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;
 4




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
    
    our ability to successfully implement our strategy to continue to grow our business
in California, Kansas and Arizona;
    
    the total return (interest income plus the change in the fair value) of our
securities portfolio may decline markedly due to the effects of falling housing prices
and constrained cash flow on the borrowers in the underlying securities due to the
severe economic and housing recession;
    
    the proposed Supervisory Agreement with the Office of Thrift Supervision may
restrict our operations, and
    
    legislative or regulatory changes or changes in accounting principles, policies or
guidelines may adversely affect our ability to conduct our business;
    
    effects of and changes in trade and monetary and fiscal policies and laws, including
the interest rate policies of the Federal Open Market Committee of the Federal Reserve
Board;
    
    FDICs temporary liquidity guaranty program and the US Treasury Capital Purchase
Program and Troubled Asset Purchase Program authorized by the emergency stabilization
act of 2008;
    
    changes imposed by regulators to increase our capital to levels greater than the
level required for well-capitalized institutions;
   
 Item 1. Business.
 
 General
   5




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1.
    
    To submit a business plan that addresses the strategies and business tactics to meet
the required capital levels and improves the institutions profitability.2.
    
    To augment its loan concentration policy to address concentrations as a percentage of
unimpaired capital.3.
    
    To revise its liquidity policy to address long and short term liquidity needs and to
maintain adequate liquidity.4.
    
    To expand and revise its internal asset review policy so it is commensurate with the
institutions size, risk, and the complexity of its lending activities, and to engage a
third party review of the commercial lending activities and the adequacy of its allowance
for loan losses. LPB will incorporate the reasonable recommendations into its policy.
  1.
    
    HWFG and LPB will not declare, make, or pay any dividends or capital distributions
without obtaining the prior written non-objection of the OTS.
 6




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2.
    
    HWFG will limit its growth in assets in any quarter to the interest credited on
deposits.3.
    
    HWFG will not incur, issue, renew, repurchase, or rollover any debt, increase any
current lines of credit, or guarantee the debt of any entity without receiving the prior
written non objection of the OTS. HWFG has no short term debt, only long term trust
preferred obligations.4.
    
    HWFG shall not make any golden parachute payment or indemnification payment unless they
comply with the requirements of regulation. HWFG will not enter into new compensation
arrangements without the prior written non-objection of the OTS. HWFG and LPB senior
officers have no employment agreements, although Concordia required them as a covenant of
its stock purchase agreement with HWFG, as an incentive to retain management.5.
    
    LPB and HWFG must notify the OTS at least 30 days before the employment of any senior
executive officer or new member of the Board(s) of Directors.6.
    
    LPB will not issue brokered deposits without the prior written approval of the Federal
Deposit Insurance Corporation (FDIC).7.
    
    LPB will purchase only agency backed and securities backed by the full faith and credit
of the US government without the prior non-objection of the OTS.8.
    
    LPB shall not enter into third party contracts outside of the normal course of business
without the prior written non-objection of the OTS9.
    
    LPB shall not engage in any transaction with affiliates or subsidiaries (except exempt
transactions) without the prior written non-objection of the OTS.
  7




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Lending Activities
 General
  December 31,2008
    
    
    2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real estate loans:Single-family
    
    $
    139,326
    
    
    
    17.2
    %
    
    $
    125,545
    
    
    
    15.9
    %
    
    $
    106,675
    
    
    
    13.9
    %Multi-family
    
    
    85,176
    
    
    
    10.4
    %
    
    
    82,717
    
    
    
    10.4
    %
    
    
    79,896
    
    
    
    10.4
    %Commercial
    
    
    260,875
    
    
    
    32.2
    %
    
    
    266,345
    
    
    
    33.7
    %
    
    
    264,915
    
    
    
    34.6
    %Construction (1)
    
    
    125,724
    
    
    
    15.4
    %
    
    
    126,447
    
    
    
    16.0
    %
    
    
    112,645
    
    
    
    14.7
    %Land acquistion
    
    
    48,546
    
    
    
    6.0
    %
    
    
    45,278
    
    
    
    5.7
    %
    
    
    54,738
    
    
    
    7.1
    %Commercial and industrial loans
    
    
    118,855
    
    
    
    14.7
    %
    
    
    117,842
    
    
    
    14.9
    %
    
    
    119,074
    
    
    
    15.6
    %Consumer loans
    
    
    29,807
    
    
    
    3.7
    %
    
    
    24,483
    
    
    
    3.1
    %
    
    
    25,304
    
    
    
    3.3
    %Other loans (2)
    
    
    3,134
    
    
    
    0.4
    %
    
    
    2,753
    
    
    
    0.3
    %
    
    
    2,206
    
    
    
    0.4
    %Total loans receivable
    
    
    811,443
    
    
    
    100.0
    %
    
    
    791,410
    
    
    
    100.0
    %
    
    
    765,453
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    (11,449
    )
    
    
    
    
    
    
    (6,446
    )
    
    
    
    
    
    
    (5,914
    )Net deferred loan fees
    
    
    (1,219
    )
    
    
    
    
    
    
    (1,865
    )
    
    
    
    
    
    
    (2,103
    )Net (discounts) premiums
    
    
    (450
    )
    
    
    
    
    
    
    (473
    )
    
    
    
    
    
    
    (403
    )(13,118
    )
    
    
    
    
    
    
    (8,784
    )
    
    
    
    
    
    
    (8,420
    )Loans receivable, net
    
    $
    798,325
    
    
    
    
    
    
    $
    782,626
    
    
    
    
    
    
    $
    757,033
 
 (1)
    
    Includes loans secured by residential and commercial properties. At December 31, 2008, we
had $32.7 million of construction loans secured by residential properties, $26.3 million of
land and development (loans for the initial acquisition of land and off-site improvements) and
$66.7 million of construction loans secured by commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans.  8




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Due 5 orDue 1-5
    
    
    more yearsyears after
    
    
    afterDue 1 year
    
    
    December
    
    
    Decemberor less
    
    
    31, 2008
    
    
    31, 2008
    
    
    TotalReal estate loans:Single-family residential
    
    $
    2,617
    
    
    $
    27,641
    
    
    $
    109,068
    
    
    $
    139,326Multi-family residential
    
    
    2,678
    
    
    
    19,414
    
    
    
    63,084
    
    
    
    85,176Commercial
    
    
    36,901
    
    
    
    88,277
    
    
    
    135,697
    
    
    
    260,875Construction (1)
    
    
    85,600
    
    
    
    12,948
    
    
    
    27,176
    
    
    
    125,724Land acquisition and development
    
    
    37,173
    
    
    
    11,163
    
    
    
    210
    
    
    
    48,546Commercial and industrial loans
    
    
    74,565
    
    
    
    32,575
    
    
    
    11,715
    
    
    
    118,855Consumer loans
    
    
    74
    
    
    
    737
    
    
    
    28,996
    
    
    
    29,807Other loans (2)
    
    
    3,099
    
    
    
    35
    
    
    
    
    
    
    
    3,134Total
    
    $
    242,707
    
    
    $
    192,790
    
    
    $
    375,946
    
    
    $
    811,443
 
 (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans.  9




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Floating oradjustableFixed rate
    
    
    rate
    
    
    TotalReal estate loans:Single-family residential
    
    $
    108,503
    
    
    $
    28,206
    
    
    $
    136,709Multi-family residential
    
    
    50,361
    
    
    
    32,137
    
    
    
    82,498Commercial
    
    
    133,160
    
    
    
    90,814
    
    
    
    223,974Construction (1)
    
    
    26,664
    
    
    
    13,460
    
    
    
    40,124Land acquisition
    
    
    2,415
    
    
    
    8,958
    
    
    
    11,373Commercial and industrial loans
    
    
    14,340
    
    
    
    29,950
    
    
    
    44,290Consumer loans
    
    
    728
    
    
    
    29,005
    
    
    
    29,733Other loans (2)
    
    
    35
    
    
    
    
    
    
    
    35Total
    
    $
    336,206
    
    
    $
    232,530
    
    
    $
    568,736
 
 (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans. Origination, Purchase and Sale of Loans.
    10




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Single-Family Residential Real Estate Loans.
   11




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Multi-Family Residential and Commercial Real Estate Loans.
    12




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Construction Loans.
    Land acquisition and development.
 13




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Commercial and Industrial Loans
  Consumer and Other Loans
   14




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Asset Quality
 General
 Loan Delinquencies
 Non-Performing Assets
 15




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At December 31,2008
    
    
    2007
    
    
    2006(Dollars in Thousands)Non-Performing loans:Single-family residential
    
    $
    444
    
    
    $
    
    
    
    $
    Multi-family residential
    
    
    135
    
    
    
    
    
    
    
    Commercial real estate
    
    
    805
    
    
    
    
    
    
    
    Construction
    
    
    5,693Land acquisition and development
    
    
    593
    
    
    
    1,843
    
    
    
    Commercial and industrial
    
    
    4,228
    
    
    
    
    
    
    
    98Consumer and other
    
    
    224
    
    
    
    
    
    
    
    Total non-performing loans
    
    
    12,122
    
    
    
    1,843
    
    
    
    98Troubled debt restructurings
    
    
    9,422
    
    
    
    
    
    
    
    Real estate owned, net of valuation allowance
    
    
    7,449
    
    
    
    
    
    
    
    Total non-performing assets and troubled debt
restructurings
    
    $
    28,993
    
    
    $
    1,843
    
    
    $
    98Total non-performing loans and troubled debt
restructurings as a percentage of total loans
    
    
    2.66
    %
    
    
    0.23
    %
    
    
    0.01
    %Total non-performing assets and troubled debt
restructurings as a percentage of total assets
    
    
    2.42
    %
    
    
    0.15
    %
    
    
    0.01
    %
   Classified Assets
 16




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Allowance for Loan Losses.
 Allocated allowance for specifically identified problem loans Accounting by Creditors for Impairment of a
Loan as amended by SFAS No. 118.
 Formula allowance for non-homogeneous loans
  Formula allowance for large groups of smaller balance homogeneous loans
 Unallocated Allowance
 17




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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;
    
    any credit concentrations or changes in the level of such concentrations;
    
    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, regional and local economic conditions;
    
    changes in value of underlying collateral for collateral-dependent loans; and
    
    the trend in local real estate values.
    18




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At December 31,2008
    
    
    2007
    
    
    2006(In Thousands)Allocated reserve
    
    $
    4,548
    
    
    $
    440
    
    
    $
    16Formula-non homogeneous
    
    
    5,610
    
    
    
    5,302
    
    
    
    5,296Formula-homogeneous
    
    
    953
    
    
    
    704
    
    
    
    560Unallocated
    
    
    338
    
    
    
    0
    
    
    
    42$
    11,449
    
    
    $
    6,446
    
    
    $
    5,914
    19




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December 31,2008
    
    
    2007
    
    
    2006(Dollars in Thousands)Balance at beginning of period
    
    $
    6,446
    
    
    $
    5,914
    
    
    $
    5,661Charge-offs:Real estate loansCommercial
    
    
    (1,315
    )
    
    
    (112
    )
    
    
    (352
    )Consumer and other loans
    
    
    (697
    )
    
    
    (7
    )
    
    
    (4
    )Total charge-offs
    
    
    (2,012
    )
    
    
    (119
    )
    
    
    (356
    )Recoveries
    
    
    25
    
    
    
    1
    
    
    
    44Net charge-offs
    
    
    (1,987
    )
    
    
    (118
    )
    
    
    (312
    )Provision for losses on loans
    
    
    6,990
    
    
    
    650
    
    
    
    565Balance at end of period
    
    $
    11,449
    
    
    $
    6,446
    
    
    $
    5,914Allowance for loan losses as a percent of total net
loans outstanding at the end of the period
    
    
    1.43
    %
    
    
    0.82
    %
    
    
    0.78
    %Ratio of net charge-offs to average loans outstanding
during the period
    
    
    0.25
    %
    
    
    0.02
    %
    
    
    0.01
    %
 20




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December 31,2008
    
    

2007
    
    
    2006(Dollars in Thousands)Amount
    
    
    Percent (1)
    
    
    Amount
    
    
    Percent (1)
    
    
    Amount
    
    
    Percent (1)Real estate loans:Single-family residential
    
    $
    553
    
    
    
    17.2
    %
    
    $
    368
    
    
    
    15.9
    %
    
    $
    231
    
    
    
    13.9
    %Multi-family residential
    
    
    610
    
    
    
    10.4
    %
    
    
    422
    
    
    
    10.5
    %
    
    
    417
    
    
    
    10.4
    %Commercial
    
    
    1,166
    
    
    
    32.2
    %
    
    
    1,008
    
    
    
    33.6
    %
    
    
    1,054
    
    
    
    34.6
    %Construction
    
    
    545
    
    
    
    15.4
    %
    
    
    498
    
    
    
    16.0
    %
    
    
    452
    
    
    
    14.7
    %Land acquisition and development
    
    
    881
    
    
    
    6.0
    %
    
    
    547
    
    
    
    5.7
    %
    
    
    520
    
    
    
    7.1
    %Commercial and industrial loans
    
    
    6,955
    
    
    
    14.7
    %
    
    
    3,267
    
    
    
    14.9
    %
    
    
    2,869
    
    
    
    15.6
    %Consumer and other loans
    
    
    401
    
    
    
    4.1
    %
    
    
    336
    
    
    
    3.4
    %
    
    
    329
    
    
    
    3.7
    %Unallocated reserve
    
    
    338
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    42
    
    
    
    0.0
    %Total
    
    $
    11,449
    
    
    
    100.0
    %
    
    $
    6,446
    
    
    
    100.0
    %
    
    $
    5,914
    
    
    
    100.0
    %
 
 (1)
    
    Percent of loans in each category to total loans (excluding unallocated reserve) 21




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Investment Activities
 General
  e.g Accounting for Certain Investments in Debt and Equity Securities,
  22




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Mortgage-Backed and Related Securities
  i.e
  23




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24




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AmortizedCost
    
    
    Fair ValueDecember 31, 2008Agency
    
    $
    50,284
    
    
    $
    50,282AAA
    
    
    49,419
    
    
    
    45,779AA
    
    
    91,981
    
    
    
    80,038A
    
    
    55,412
    
    
    
    49,840BBB
    
    
    25,016
    
    
    
    21,888Below investment grade
    
    
    28,924
    
    
    
    25,851$
    301,036
    
    
    $
    273,678
 AmortizedCost
    
    
    Fair ValueDecember 31, 2007Agency
    
    $
    69,570
    
    
    $
    69,101AAA
    
    
    139,890
    
    
    
    138,744AA
    
    
    115,084
    
    
    
    106,090A
    
    
    41,621
    
    
    
    34,691BBB
    
    
    170
    
    
    
    170Below investment grade
    
    
    3,960
    
    
    
    2,670$
    370,295
    
    
    $
    351,466
 25




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AmortizedCost
    
    
    Fair ValueDecember 31, 2008Agency MBS
    
    $
    50,284
    
    
    $
    50,282Non-agency mortgage securities
    
    
    82,878
    
    
    
    76,522Subprime mortgage securities
    
    
    164,148
    
    
    
    144,274Other securities
    
    
    3,726
    
    
    
    2,600$
    301,036
    
    
    $
    273,678
 AmortizedCost
    
    
    Fair ValueDecember 31, 2007Agency MBS
    
    $
    69,570
    
    
    $
    69,101Non-agency mortgage securities
    
    
    113,412
    
    
    
    111,677Subprime mortgage securities
    
    
    183,065
    
    
    
    166,715Other securities
    
    
    4,248
    
    
    
    3,973$
    370,295
    
    
    $
    351,466
    26




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##### Table of Contents



Asset Backed Securities (not mortgage-related)
 Trading Account Assets and Other Securities
   27




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##### Table of Contents



2008
    
    
    2007Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    
    
    
    
    Average
    
    
    Amortized
    
    
    
    
    
    
    Average(Dollars in thousands)
    
    Cost
    
    
    Fair Value
    
    
    Yield
    
    
    Cost
    
    
    Fair Value
    
    
    YieldMortgage-backed securities  pass throughsDue from one to five years
    
    $
    149
    
    
    $
    146
    
    
    
    3.17
    %
    
    $
    510
    
    
    $
    497
    
    
    
    4.47
    %Due from five to ten years
    
    
    2,853
    
    
    
    2,927
    
    
    
    5.89
    %
    
    
    9,951
    
    
    
    9,983
    
    
    
    5.17
    %Due over ten years
    
    
    47,282
    
    
    
    47,209
    
    
    
    4.74
    %
    
    
    59,109
    
    
    
    58,621
    
    
    
    5.42
    %Total mortgage backed securities  pass
throughs (1)
    
    
    50,284
    
    
    
    50,282
    
    
    
    4.80
    %
    
    
    69,570
    
    
    
    69,101
    
    
    
    5.37
    %Collateralized mortgage obligationsDue over ten years
    
    
    83,376
    
    
    
    77,236
    
    
    
    3.94
    %
    
    
    114,101
    
    
    
    111,805
    
    
    
    5.61
    %Total collateralized mortgage obligations
    
    
    83,376
    
    
    
    77,236
    
    
    
    3.94
    %
    
    
    114,101
    
    
    
    111,805
    
    
    
    5.61
    %Asset backed securities (underlying
securities mortgages)Due from one to five years
    
    
    1,125
    
    
    
    1,001
    
    
    
    1.03
    %
    
    
    2,183
    
    
    
    1,855
    
    
    
    5.11
    %Due over ten years
    
    
    164,596
    
    
    
    144,458
    
    
    
    2.33
    %
    
    
    182,541
    
    
    
    166,967
    
    
    
    9.87
    %Total asset backed securities
    
    
    165,721
    
    
    
    145,459
    
    
    
    2.32
    %
    
    
    184,724
    
    
    
    168,822
    
    
    
    9.81
    %Asset backed securitiesDue from one to five years
    
    
    355
    
    
    
    47
    
    
    
    5.35
    %
    
    
    600
    
    
    
    563
    
    
    
    10.96
    %Due over ten years
    
    
    1,300
    
    
    
    654
    
    
    
    2.52
    %
    
    
    1,300
    
    
    
    1,175
    
    
    
    5.29
    %Total asset backed securities
    
    
    1,655
    
    
    
    701
    
    
    
    3.13
    %
    
    
    1,900
    
    
    
    1,738
    
    
    
    7.08
    %Total
    
    $
    301,036
    
    
    $
    273,678
    
    
    
    3.16
    %
    
    $
    370,295
    
    
    $
    351,466
    
    
    
    7.70
    %
 
 (1)
    
    The fair value at December 31, 2008, consisted of $10.5 million of Fannie Mae participation
certificates, $1.0 million of Freddie Mac participation certificates and $38.8 million of Ginnie
Mae participation certificates. At December 31, 2007, the portfolio consisted of $19.3 million of
Fannie Mae participation certificates, $1.4 million of Freddie Mac participation certificates and
$48.4 million of Ginnie Mae participation certificates. 28




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##### Table of Contents



2008
    
    
    2007Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average(Dollars in thousands)
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    YieldMortgage-backed securities
pass throughsDue from five to ten years (1)
    
    $
    34
    
    
    $
    35
    
    
    
    6.82
    %
    
    $
    53
    
    
    $
    55
    
    
    
    6.83
    %Due over ten years (1)
    
    
    3
    
    
    
    3
    
    
    
    7.42
    %
    
    
    3
    
    
    
    3
    
    
    
    7.44
    %Total
    
    $
    37
    
    
    $
    38
    
    
    
    6.87
    %
    
    $
    56
    
    
    $
    58
    
    
    
    6.83
    %
 
 (1)
    
    Consists entirely of Fannie Mae participation certificates.  2008
    
    
    2007Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    
    
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average(Dollars in thousands)
    
    Cost
    
    
    Fair Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    YieldTotal Mortgage-backed securities
    
    $
    167
    
    
    $
    169
    
    
    
    4.82
    %
    
    $
    195
    
    
    $
    194
    
    
    
    5.79
    %Mutual funds
    
    
    608
    
    
    
    575
    
    
    
    
    
    
    
    635
    
    
    
    656Other securities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,457Total
    
    $
    775
    
    
    $
    744
    
    
    
    1.04
    %
    
    $
    830
    
    
    $
    2,307
    
    
    
    1.36
    %
 
 (1)
    
    The balance at December 31, 2007 consisted of total return swaps, which we used to enhance
our returns, and
interest-rate contracts, which do not qualify for hedge accounting treatment pursuant to SFAS
No. 133. 29




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##### Table of Contents



At or for the YearsEnding December 31,(Dollars in thousands)
    
    2008
    
    
    2007Beginning balance
    
    $
    351,524
    
    
    $
    309,800Mortgage-backed securities pass-throughs purchased-
available for sale
    
    
    
    
    
    
    7,305Collateralized mortgage obligations purchased-
    
    
    
    
    
    
    65,368Commercial mortgage-backed securities purchased-
available for sale
    
    
    154,109
    
    
    
    Asset-backed securities purchased- available for sale
    
    
    8,392
    
    
    
    124,860Total securities purchased
    
    
    162,501
    
    
    
    197,533Less:Sale and principal payments of mortgage-backed
securities, pass throughs  available for sale
    
    
    (19,015
    )
    
    
    (35,280
    )Sale and principal payments of collateralized mortgage
obligations  available for sale
    
    
    (26,889
    )
    
    
    (27,569
    )Sale and principal payments of commercial mortgage-
backed securities  available for sale
    
    
    (154,122
    )
    
    
    (31,054
    )Sale and principal payments of asset-backed securities
available for sale
    
    
    (20,684
    )
    
    
    (42,015
    )Principal payments of mortgage-backed securities,
pass throughs  held to maturity
    
    
    (19
    )
    
    
    (13
    )Total securities sold and repaid
    
    
    (220,729
    )
    
    
    (135,931
    )Change in net unrealized gain (loss) on securities
available for sale and held to maturity
    
    
    (8,529
    )
    
    
    (17,259
    )Other-than-temporary loss on available for sale
securities
    
    
    (11,824
    )
    
    
    (2,153
    )(Amortization of premium)/accretion of discount
    
    
    773
    
    
    
    (466
    )Ending balance
    
    $
    273,716
    
    
    $
    351,524
 30




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##### Table of Contents



Sources of Funds
 General
 Deposits
  Amount(In Thousands)Certificates of deposit maturing:Three months or less
    
    $
    205,356Over three through six months
    
    
    147,484Over six through twelve
    
    
    67,350Over twelve months
    
    
    6,354Total
    
    $
    426,544
 31




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##### Table of Contents



At December 31,2008
    
    
    2007
    
    
    2006(In Thousands)0.00% to 2.99%
    
    $
    296,594
    
    
    $
    2,120
    
    
    $
    2,7633.00% to 3.99%
    
    
    353,265
    
    
    
    49,505
    
    
    
    24,3394.00% to 4.99%
    
    
    24,380
    
    
    
    397,194
    
    
    
    192,9375.00% to 5.99%
    
    
    1,944
    
    
    
    212,268
    
    
    
    336,245Total
    
    $
    676,183
    
    
    $
    661,087
    
    
    $
    556,284
  Over six
    
    
    Over One
    
    
    Over TwoMonths
    
    
    Year
    
    
    YearsSix Months
    
    
    Through
    
    
    Through
    
    
    Through
    
    
    Over Threeand Less
    
    
    One Year
    
    
    Two Years
    
    
    Three Years
    
    
    Years
    
    
    Total(In Thousands)0.00% to 2.99%
    
    $
    227,458
    
    
    $
    66,936
    
    
    $
    1,411
    
    
    $
    696
    
    
    $
    93
    
    
    $
    296,5943.00% to 3.99%
    
    
    320,195
    
    
    
    30,894
    
    
    
    677
    
    
    
    710
    
    
    
    789
    
    
    
    353,2654.00% to 4.99%
    
    
    7,177
    
    
    
    9,993
    
    
    
    3,699
    
    
    
    1,456
    
    
    
    2,055
    
    
    
    24,3805.00% to 5.99%
    
    
    336
    
    
    
    628
    
    
    
    1
    
    
    
    412
    
    
    
    567
    
    
    
    1,944Total
    
    $
    555,166
    
    
    $
    108,451
    
    
    $
    5,788
    
    
    $
    3,274
    
    
    $
    3,504
    
    
    $
    676,183
 Borrowings.
   32




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##### Table of Contents



At or For the Year EndedDecember 31,2008
    
    2007
    
    2006(Dollars in Thousands)Securities sold under agreements to repurchase:Average balance outstanding
    
    $
    5,119
    
    
    $
    5,576
    
    
    $
    1,212Maximum amount outstanding at any month-end
during the period
    
    
    6,229
    
    
    
    6,729
    
    
    
    6,141Balance outstanding at end of period
    
    
    4,499
    
    
    
    4,981
    
    
    
    6,141Average interest rate during the period
    
    
    2.29
    %
    
    
    3.61
    %
    
    
    3.93
    %Average interest rate at end of period
    
    
    2.04
    %
    
    
    3.32
    %
    
    
    4.11
    %Short-term FHLB advances:Average balance outstanding
    
    $
    214,987
    
    
    $
    215,544
    
    
    $
    267,452Maximum amount outstanding at any month-end
during the period
    
    
    250,000
    
    
    
    262,000
    
    
    
    310,000Balance outstanding at end of period, net
of hedging costs
    
    
    171,000
    
    
    
    228,000
    
    
    
    238,000Average interest rate during the period
    
    
    2.22
    %
    
    
    5.18
    %
    
    
    5.05
    %Average interest rate at end of period
    
    
    .05
    %
    
    
    4.27
    %
    
    
    5.29
    %
 33




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##### Table of Contents



Subsidiaries
      
 Employees
  
 Regulation of Harrington West Financial Group, Inc.
 General
 Activities Restriction Test
 34




---



##### Table of Contents



Restrictions on Acquisitions
  
 Regulation of Los Padres Bank
 General
   Insurance of Deposit Accounts
 35




---



##### Table of Contents



Regulatory Capital Requirements and Prompt Corrective Action
  36




---



##### 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.
  37




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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
    
    $
    87,584
    
    
    
    7.24
    %
    
    $
    87,584
    
    
    
    7.24
    %
    
    $
    94,485
    
    
    
    10.21
    %Minimum regulatory capital
    
    
    18,145
    
    
    
    1.50
    %
    
    
    48,387
    
    
    
    4.00
    %
    
    
    74,066
    
    
    
    8.00
    %Excess regulatory capital
    
    $
    69,439
    
    
    
    5.74
    %
    
    $
    39,197
    
    
    
    3.24
    %
    
    $
    20,419
    
    
    
    2.21
    %Requirements of the
Supervisory
Agreement with the OTSActual regulatory capital
    
    $
    87,584
    
    
    
    7.24
    %
    
    $
    87,584
    
    
    
    7.24
    %
    
    $
    94,485
    
    
    
    10.21
    %Minimum per Supervisory
    
    
    84,678
    
    
    
    7.00
    %
    
    
    84,678
    
    
    
    7.00
    %
    
    
    111,100
    
    
    
    12.00
    %$
    2,906
    
    
    
    0.24
    %
    
    $
    2,906
    
    
    
    0.24
    %
    
    
    ($16,615
    )
    
    
    (1.79
    %)
 
 (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 $88.0 million
as of December 31, 2008.  Loans-to-One Borrower Limitations
 
    
    the final purchase price of each single family dwelling unit that is financed 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.
    
    lending under the general 10% and 10% limits are considered part of the $30.0
million or 30% exception limit
  38




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##### Table of Contents



Qualified Thrift Lender Test
 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.The OTS regulations require a savings association to file an application if:
    
    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.
 39




---



##### Table of Contents




    
    would not be well-capitalized under the prompt corrective action regulations of the
OTS following the distribution;
    
    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
    
    4.7% of its FHLB advances or borrowings.
  Federal Reserve System
 Activities of Subsidiaries
 40




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##### Table of Contents



Legislation
 USA Patriot Act of 2001.
 Financial Services Modernization Legislation.
     41




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##### Table of Contents



Sarbanes-Oxley Act
  
 Item 1A. Risk Factors
   Current levels of market volatility are unprecedented.
  The current changing economic environment poses significant challenges for us.
  
    
    Loan delinquencies, problem assets and foreclosures may increase;
 42




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##### Table of Contents




    
    Delinquencies and losses in the collateral backing investments may erode remaining
credit enhancement resulting in additional OTTI;
    
    Demand for our products and services may decline;
    
    Low cost or non-interest bearing deposits may decrease; and
    
    Collateral for our loans, especially real estate, may decline in value, in turn
reducing customers borrowing power, and reducing the value of assets and collateral
associate with our existing loans.
 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.
 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.
 43




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##### Table of Contents



Our consumer loans generally have a higher risk of default than our other loans
 Our investment portfolio includes securities which are sensitive to interest rates and spread
changes and which we may be required to sell to meet our liquidity needs.
    Our other-than-temporary impairment charges taken to-date may prove to be insufficient to absorb
losses inherent in our investment portfolio.
  Our allowance for loan losses may prove to be insufficient to absorb probable incurred losses
inherent in our loan portfolio.
  
    
    cash flow of the borrower and/or the project being financed;
 44




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##### Table of Contents




    
    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 interest rate risk and variations in interest rates may negatively
affect our financial performance.
   
    
    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.
  45




---



##### Table of Contents



Our business is subject to economic and other general risks which may adversely impact our results
of operations and financial condition.
       46




---



##### Table of Contents



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
    
    collateral, for loans made by us, especially real estate, may decline in value, in
turn reducing customers borrowing power.
 A further 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.
 47




---



##### Table of Contents



We invest in interest rate contracts which can cause losses to us in excess of the value at which
we carry these investments.
   
    
    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 temporary slowed growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
  48




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##### Table of Contents



We are dependent on key individuals and our ability to attract and retain banking professionals
with significant experience in our local markets.
  We face strong competition from other financial institutions, financial service companies and other
companies that offer banking services which can hurt our business
  49




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##### Table of Contents



We continually encounter technological change, and we may have fewer resources than many of our
competitors to continue to invest in technological improvements.
  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.
    50




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##### Table of Contents



Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
  Deposit insurance assessments will increase substantially, which will adversely affect profits.
  Recently enacted legislation and other measures undertaken by the Treasury, the FRB and other
governmental agencies may not help stabilize the U.S. financial system or improve the housing
market.
  
    
    Authority for the FRB to pay interest on depository institutions reserve balances;
    
    Mortgage loss mitigation and homeowner protection;
    
    Temporary increase in FDIC insurance coverage from $100,000 to
$250,000 through December 31, 2009; and
    
    Authority to the SEC to suspend mark-to-market accounting requirements
for any issuer or class of category of transactions.
  51




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##### Table of Contents



52




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##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
 Office Locations
  Total DepositsLeased/Owned
    
    Date Office
    
    atand Lease Expiration
    
    Opened or
    
    December 31, 2008Office Location
    
    Date
    
    Purchase Date
    
    (Dollars in thousands)Solvang Branch and Administrative Offices
    
    Lease expires on 1/31/10
    
    June 1983
    
    $
    221,309610 Alamo Pintado Road
    
    with one option for five yearsSolvang, CA. 93463Loan Center
    
    Lease expires on 1/31/10
    
    March 1998
    
    
    1992 Old Mission Drive
    
    with one option for five yearsSolvang, CA. 93463Pismo Branch
    
    Lease expires on 2/09/13
    
    May 1998
    
    
    81,742831 Oak Park Boulevard
    
    with one option for five yearsPismo Branch, CA.93449Atascadero Branch
    
    Lease expires on 4/30/11
    
    May 1991
    
    
    56,1167315 El Camino Real
    
    with three options for five yearsAtascadero, CA.93422Santa Maria Branch
    
    Lease expires on 6/30/12
    
    July 1992
    
    
    71,290402 E. Main Street
    
    with two options for five yearsSanta Maria, CA.93454Buellton Branch
    
    Lease expires on 11/02/12
    
    December 1997
    
    
    17,492234 E. Highway 246, Suite 109
    
    with two options for five yearsBuellton, CA. 93427Goleta Branch
    
    Lease expires on 10/31/13
    
    February 1999
    
    
    103,263197 North Fairview
    
    with two options for five yearsGoleta, CA. 93117San Luis Branch
    
    Lease expires on 12/31/10
    
    January 2001
    
    
    32,7161322 Madonna Road
    
    with one option for five yearsSan Luis Obispo, CA.93405Nipomo Branch
    
    Lease expires on 12/31/10
    
    July 2001
    
    
    32,233542 W. Teft Road
    
    with two options for five yearsNipomo, CA. 93444
 53




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##### Table of Contents



Total DepositsLeased/Owned
    
    Date Office
    
    atand Lease Expiration
    
    Opened or
    
    December 31, 2008Office Location
    
    Date
    
    Purchase Date
    
    (Dollars in thousands)Storage Area
    
    Month-to-Month Lease
    
    June 1992
    
    
    1120 Mission Drive
    
    with no expiration dateSolvang, CA. 93463Human Resources, Compliance &
    
    Lease expires on 1/31/10
    
    March 2000
    
    
    Training Room
    
    with one option for five years1984 Old Mission Drive, Suites A-4 and A-5Solvang, CA. 93463Loan Origination Center
    
    Lease expires on 1/31/10
    
    April 2002
    
    
    1988 Old Mission Drive, Suite B-12
    
    with one option for five yearsSolvang, CA. 93463Harrington Bank
    
    Lease expires on 12/31/10
    
    November 2001
    
    
    60,5136300 Nall Avenue
    
    with four options for five yearsShawnee Mission, KS. 66208Harrington Wealth Management Company
    
    Lease expires on 10/31/11
    
    November 2001
    
    
    10150 Lantern Road, Suite 150Fishers, IN. 46038Arizona  Mirage Branch
    
    Lease expires on 9/30/12
    
    November 2002
    
    
    29,52610555 North 114th Street, Suite 100
    
    with two options for five yearsScottsdale, AZ. 85295Ventura Branch
    
    Lease expires on 11/27/13
    
    May 2004
    
    
    45,1081171 S. Victoria Ave., Suite A
    
    with three options for five yearsVentura, CA. 93003Thousand Oaks Branch
    
    Lease expires on 5/31/10
    
    June 2005
    
    
    26,2832920 Thousand Oaks Blvd, Suite A
    
    with two options for five yearsThousand Oaks, CA. 91360Storage Area
    
    Month-to-Month Lease
    
    August 2004
    
    
    10760 North 116th Street
    
    with no expiration dateScottsdale, AZ. 85259Storage Area
    
    Month-to-Month Lease
    
    August 2006
    
    
    10555 North 114th Street
    
    with no expiration dateScottsdale, AZ. 85259Arizona  Airpark Branch
    
    Owned
    
    December 2004
    
    
    24,12614100 N. Northsight Blvd.Scottdale, AZ. 85260Ojai Branch
    
    Owned
    
    November 1997
    
    
    48,569110 South Ventura StreetOjai, CA. 93023Metcalf Branch
    
    Owned
    
    December 2003
    
    
    23,68914300 MetcalfOverland Park, KS. 66223
 54




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##### Table of Contents



Total DepositsLeased/Owned
    
    Date Office
    
    atand Lease Expiration
    
    Opened or
    
    December 31, 2008Office Location
    
    Date
    
    Purchase Date
    
    (Dollars in thousands)Olathe Branch
    
    Owned
    
    November 2005
    
    
    14,639College & Pflumm RdsOlathe, KS. 66215Arizona  Surprise Branch
    
    Owned
    
    January 2006
    
    
    10,979Bell Road & 114th Ave.Surprise, AZ. 85374Deer Valley Branch
    
    Owned
    
    April 2006
    
    
    NWC 19th Ave. & Pinnacle Peak Rd.Phoenix. AZ.Gilbert Branch
    
    Owned
    
    December 2006
    
    
    Lindsay & Warner RdsGilbert, AZ.TOTAL DEPOSITS
    
    
    
    
    
    $
    899,593
 
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  55




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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
   DividendsQuarter Ended
    
    High
    
    Low
    
    DeclaredMarch 31, 2007
    
    $
    17.98
    
    
    $
    16.90
    
    
    $
    0.125June 30, 2007
    
    
    17.28
    
    
    
    15.80
    
    
    
    0.425September 30, 2007
    
    
    16.19
    
    
    
    14.60
    
    
    
    December 31, 2007
    
    
    12.46
    
    
    
    11.01
    
    
    
    0.125March 31, 2008
    
    
    12.48
    
    
    
    7.25
    
    
    
    0.070June 30, 2008
    
    
    8.32
    
    
    
    3.68
    
    
    
    September 30, 2008
    
    
    6.99
    
    
    
    2.40
    
    
    
    December 31, 2008
    
    
    5.92
    
    
    
    1.25
    
    
    
    
   1.
    
    On September 29, Concordia purchased 458,768 shares of common stock and 61,757
of the preferred stock for proceeds of $4.4 million in the first closing.2.
    
    After receiving OTS agreement for Concordias rebuttal of HWFG control and HWFG
shareholder approval in the December 2008 quarter, Concordia purchased 180,082 shares
of
 56




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##### Table of Contents



common stock and 24,242 shares of preferred stock on the same terms or $1.7 million in
proceeds in the second closing.
 3.
    
    A stock subscription receivable was recorded at December 31, 2008 for the
remaining 54,001 shares of preferred stock and 401,150 additional shares of common
stock on the same terms or $3.9 million in proceeds. HWFG holds $3.9 million in notes
from Concordia with a pledge of the $1.7 million of shares purchased in the second
closing while Concordia executed the drawdown of funds.4.
    
    HWFG holds $3.9 million in demand notes from Concordia for the remaining
401,150 shares of common and 54,001 shares of Series A preferred to be purchased as
part of the second closing, and which will not be issued until the payoff of the notes.
The notes are collateralized by the 180,082 shares of common and the 24,242 shares of
preferred purchased in the second closing for cash. As of the date of this 10K filing,
the notes remain unpaid and HWFG is working with Concordia to obtain payment. On
September 29, 2008, Concordia previously purchased 458,768 shares of common stock and
61,757 of the preferred stock on the same terms for proceeds of $4.4 million. An
additional 57,000 shares of the preferred stock were purchased on September 29, 2008 by
other accredited investors and HWFG Board members for $1.4 million in proceeds.
 Dividends
   57




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##### Table of Contents



Recent Sales of Unregistered Securities
 Number ofPrice Per
    
    
    Shares
    
    
    AmountDate
    
    Title of Security
    
    
    Share
    
    
    (In thousands)
    
    
    (In thousands)December 31, 2008
    
    Common
    
    $
    6.25
    
    
    
    180,082
    
    
    $
    1,125,513December 31, 2008
    
    Preferred
    
    
    25.00
    
    
    
    24,242
    
    
    
    606,048Total
    
    
    
    
    
    
    
    
    
    
    204,324
    
    
    $
    1,731,561
 Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  58




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##### Table of Contents



Item 6. Selected Financial Data.
   At or For the Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Selected Financial Condition Data:Total assets
    
    $
    1,195,635
    
    
    $
    1,223,402
    
    
    $
    1,154,473
    
    
    $
    1,140,187
    
    
    $
    1,081,330Loans receivable, net
    
    
    798,325
    
    
    
    782,626
    
    
    
    757,033
    
    
    
    672,890
    
    
    
    598,442Securities available for sale
    
    
    273,678
    
    
    
    351,466
    
    
    
    309,729
    
    
    
    387,352
    
    
    
    431,206Securities held to maturity
    
    
    37
    
    
    
    56
    
    
    
    69
    
    
    
    80
    
    
    
    93Trading account assets
    
    
    744
    
    
    
    2,307
    
    
    
    837
    
    
    
    975
    
    
    
    1,046Deposits
    
    
    899,593
    
    
    
    836,333
    
    
    
    732,757
    
    
    
    669,145
    
    
    
    598,182FHLB advances
    
    
    190,000
    
    
    
    247,000
    
    
    
    257,000
    
    
    
    319,000
    
    
    
    316,000Securities sold under repurchase agreements
    
    
    19,499
    
    
    
    49,981
    
    
    
    65,141
    
    
    
    59,013
    
    
    
    79,689Other debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Stockholders equity
    
    
    46,438
    
    
    
    55,042
    
    
    
    67,698
    
    
    
    59,574
    
    
    
    52,660Shares outstanding
    
    
    6,770,093
    
    
    
    5,554,003
    
    
    
    5,460,393
    
    
    
    5,384,843
    
    
    
    5,278,934Selected Income Statement Data:Interest income
    
    $
    72,100
    
    
    $
    80,124
    
    
    $
    74,095
    
    
    $
    62,056
    
    
    $
    52,266Interest expense
    
    
    41,649
    
    
    
    48,271
    
    
    
    43,341
    
    
    
    31,898
    
    
    
    22,718Net interest income
    
    
    30,451
    
    
    
    31,853
    
    
    
    30,754
    
    
    
    30,158
    
    
    
    29,548Provision for loan losses
    
    
    6,990
    
    
    
    650
    
    
    
    565
    
    
    
    435
    
    
    
    650Net interest income after provision for loan losses
    
    
    23,461
    
    
    
    31,203
    
    
    
    30,189
    
    
    
    29,723
    
    
    
    28,898Other income:Net gain (loss) on sale of available-for-sale securities
    
    
    1,107
    
    
    
    (1,004
    )
    
    
    (613
    )
    
    
    933
    
    
    
    690Income (loss) from trading assets
    
    
    (8,699
    )
    
    
    (2,798
    )
    
    
    1,024
    
    
    
    3
    
    
    
    571Other-than-temporary loss
    
    
    (11,824
    )
    
    
    (2,153
    )
    
    
    
    
    
    
    
    
    
    
    Gain on termination of cash flow hedge
    
    
    1,889
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on write-down of real estate owned
    
    
    (4,442
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (189
    )Other gain (loss)
    
    
    1,045
    
    
    
    (1
    )
    
    
    (39
    )
    
    
    (15
    )
    
    
    (57
    )Banking fee income and other income(1)
    
    
    3,937
    
    
    
    4,326
    
    
    
    4,085
    
    
    
    3,948
    
    
    
    3,148Total other income
    
    
    (16,987
    )
    
    
    (1,630
    )
    
    
    4,457
    
    
    
    4,869
    
    
    
    4,163Other expenses:Salaries and employee benefits
    
    
    13,372
    
    
    
    13,157
    
    
    
    12,478
    
    
    
    11,166
    
    
    
    10,522Premises and equipment
    
    
    4,077
    
    
    
    3,875
    
    
    
    3,744
    
    
    
    3,884
    
    
    
    3,153Other expenses(2)
    
    
    7,235
    
    
    
    5,892
    
    
    
    5,938
    
    
    
    6,026
    
    
    
    5,741Total other expense
    
    
    24,684
    
    
    
    22,924
    
    
    
    22,160
    
    
    
    21,076
    
    
    
    19,416Income (loss) before income taxes
    
    
    (18,210
    )
    
    
    6,649
    
    
    
    12,486
    
    
    
    13,516
    
    
    
    13,645Provision for income tax expense (benefit)
    
    
    (7,400
    )
    
    
    2,481
    
    
    
    4,258
    
    
    
    5,180
    
    
    
    5,436Net income (loss)
    
    $
    (10,810
    )
    
    $
    4,168
    
    
    $
    8,228
    
    
    $
    8,336
    
    
    $
    8,209Dividend on preferred stock
    
    $
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) available to common shareholders
    
    $
    (10,871
    )
    
    $
    4,168
    
    
    $
    8,228
    
    
    $
    8,336
    
    
    $
    8,209Preferred Stock Summary:Stockholders equity per preferred share
    
    $
    23.08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    $
    142,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common Stock Summary:Basic earnings (loss) per share
    
    $
    (1.78
    )
    
    $
    0.75
    
    
    $
    1.51
    
    
    $
    1.56
    
    
    $
    1.56Diluted earnings (loss) per share
    
    $
    (1.78
    )
    
    $
    0.74
    
    
    $
    1.48
    
    
    $
    1.48
    
    
    $
    1.46Dividends per common share
    
    $
    0.20
    
    
    $
    0.68
    
    
    $
    0.50
    
    
    $
    0.49
    
    
    $
    0.88Stockholders equity per common share
    
    $
    6.37
    
    
    $
    9.91
    
    
    $
    12.40
    
    
    $
    11.06
    
    
    $
    9.98Diluted weighted average shares outstanding
    
    
    6,115,540
    
    
    
    5,637,415
    
    
    
    5,572,664
    
    
    
    5,620,556
    
    
    
    5,603,680
 59




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##### Table of Contents



At or For the Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Selected Operating Data(3):Performance Ratios and Other Data:Return on average assets
    
    
    (.89
    )%
    
    
    0.36
    %
    
    
    0.72
    %
    
    
    0.75
    %
    
    
    0.80
    %Return on average equity
    
    
    (23.27
    )%
    
    
    6.29
    %
    
    
    12.85
    %
    
    
    14.61
    %
    
    
    16.30
    %Average equity to average assets
    
    
    3.80
    %
    
    
    5.71
    %
    
    
    5.62
    %
    
    
    5.14
    %
    
    
    4.87
    %Interest rate spread (4)
    
    
    2.41
    %
    
    
    2.60
    %
    
    
    2.56
    %
    
    
    2.63
    %
    
    
    2.77
    %Net interest margin (4)
    
    
    2.59
    %
    
    
    2.90
    %
    
    
    2.83
    %
    
    
    2.83
    %
    
    
    2.93
    %Average interest-earning assets to average interest-bearing
liabilities
    
    
    105.20
    %
    
    
    106.81
    %
    
    
    106.82
    %
    
    
    106.61
    %
    
    
    107.09
    %Total noninterest expenses to average total assets
    
    
    2.02
    %
    
    
    1.97
    %
    
    
    1.94
    %
    
    
    1.86
    %
    
    
    1.88
    %Efficiency ratio(5)
    
    
    71.78
    %
    
    
    63.36
    %
    
    
    63.61
    %
    
    
    61.80
    %
    
    
    59.38
    %Asset Quality Ratios (6):Non-performing loans and troubled debt restructurings to
total loans
    
    
    2.66
    %
    
    
    0.23
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.02
    %Non-performing assets and troubled debt restructurings to
total assets
    
    
    2.42
    %
    
    
    0.15
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %Allowance for loan losses to total net loans
    
    
    1.43
    %
    
    
    0.82
    %
    
    
    0.78
    %
    
    
    0.84
    %
    
    
    0.87
    %Net charge-offs to average loans outstanding
    
    
    0.25
    %
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %Bank Regulatory Capital Ratios:Tier 1 risk-based capital ratio
    
    
    9.46
    %
    
    
    9.73
    %
    
    
    10.08
    %
    
    
    9.96
    %
    
    
    10.37
    %Total risk-based capital ratio
    
    
    10.21
    %
    
    
    10.45
    %
    
    
    10.78
    %
    
    
    10.69
    %
    
    
    11.13
    %Tier 1 leverage capital ratio
    
    
    7.24
    %
    
    
    6.93
    %
    
    
    7.41
    %
    
    
    6.78
    %
    
    
    6.68
    %
 
 (1)
    
    Consists of service charges, wholesale mortgage banking income, other commissions and fees,
other miscellaneous non-interest income and increase in cash surrender value of life
insurance.(2)
    
    Consists of computer services, consulting fees, marketing and other miscellaneous
non-interest 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 non-interest expenses as a percentage of the aggregate of net
interest income before provision for loan losses and non-interest income, excluding gains on
sales of securities, loans, fixed assets and gains in termination of cash flow hedges.(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
  60




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##### Table of Contents



Multiple Market Strategy
  1.
    
    Diversification of the loan portfolio and economic and credit risk.2.
    
    Options to capitalize on the most favorable growth markets.3.
    
    The capability to deploy the Companys diversified product mix and emphasize
those products that are best suited for the market.4.
    
    The ability to price products strategically among the markets in an attempt to
maximize profitability.
   
 Product Line Diversification
   
 Investment Management
  61




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##### Table of Contents



Control Banking Risks
  
 Performance Measurement
  
 Profitability Drivers
  1.
    
    Growing our non-costing consumer and commercial deposits and continuing to change the
mix of deposits to fewer time based certificates of deposit. This strategy is expected to
lower our deposit cost and increase our net interest margin over time. We have emphasized
the development of low cost business accounts and our full-service, free checking and money
market accounts for consumers.2.
    
    Changing the mix of our loans to higher risk-adjusted spread earning categories such as
business lending, commercial real estate lending, small tract construction,
construction-to-permanent loan lending and selected consumer lending activities such as
home equity line of credit loans, commensurate with our credit policy and the economic
environment.3.
    
    Diversifying and growing our banking fee income through existing and new fee income
sources such as our overdraft protection program and other deposit fees, loan fee income
from mortgage banking, prepayment penalty fees and other loan fees, Harrington Wealth
Management trust and investment fees, and other retail banking fees.4.
    
    Achieving a high level of performance on our investment portfolio by earning a pre-tax
total return consisting of interest income plus net gains and losses on securities and
related total return swaps over one month LIBOR of approximately 1.00% per annum. With our
skills in investment and risk management, we utilize excess equity capital by investing in
a high credit quality, mortgage and related securities portfolio managed to a short
duration of three to six months. From 2001 to 2004 the investment portfolios performance
exceeded our goals and contributed to our record profit performance due to favorable
selection of securities and spread tightening on these securities. From 2005 to 2006 the
investment portfolio underperformed our goal but still earned a total return in excess of
one-month LIBOR. In 2007 and 2008 the investment portfolio significantly underperformed
our goal as a result of the severe credit market dislocations.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.
  62




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##### Table of Contents



Strategic Response to the Current Operating Environment, Housing Downturn, and Economic Recession
   1.
    
    The economy will remain in a major recession throughout most of 2009 with some
improvement in the latter quarters. Housing prices will continue to be under pressure
until mid to late 2009 and then start to stabilize with a very slow climb.2.
    
    A major fiscal stimulus bill and foreclosure reduction program has been enacted. We
expect additional stimulus programs will be implemented in 2009, especially if the housing
market or employment rates do not improve.3.
    
    The Federal Reserve will continue to aggressively use non-monetary policy tools to keep
interest and mortgage rates low and improve credit spreads by aggressively buying fixed
income and mortgage assets in order to stimulate buying in the housing market.4.
    
    The Treasury may reinitiate a troubled asset repurchase program by mid 2009 and will
allocate more TARP funds to banks.5.
    
    Combined actions will pull the US into a more normal growth environment by mid 2010.
Credit spreads and credit availability will improve moderately over the 2009 to 2010
period.6.
    
    Our Kansas and central California markets will be more insulated from the housing
recession and job losses but still highly affected, with Arizona having higher housing
price depreciation on a median basis. Arizona, however, will have a faster recovery due to
its desirable weather pattern and the strong immigration due to demographic trends and job
availability (higher retirement and more migration from higher cost and colder weather
states).
 
 HWFGs Response
   63




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##### Table of Contents



a.
    
    Leverage our intensive sales, marketing and service program that emphasize the
building of core deposits. We have experienced favorable progress in this regard in
the late December 2008 quarter into the March 2009 quarter with growth in deposits,
after losing about 3% of our deposits in the September to December 2008 quarters as the
crisis of confidence in the banking industry became elevated. The higher deposit
insurance levels enacted in 2008 and the reduced amount of high rate paying
institutions in our markets starved for liquidity have improved the situation.b.
    
    Efficiently pledge all mortgage and other eligible collateral to the FHLB and
FRB to increase borrowing capacity to maximum levels.c.
    
    Reduce brokered deposits over time as the core franchise continues to build.
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##### Table of Contents



d.
    
    Seek to maintain excess borrowing capacity above $100 million.
  a.
    
    Re-price loan renewals to the current higher spread environment while adding
floors or maintaining floor rates on floating rate loans. Continue to hedge fixed rate
risk.b.
    
    Manage NPAs to a low level to the extent possible to reduce non-accrued
interest.c.
    
    Re-price lower our core deposits to improve margins as the high rate paying
competition diminishes.d.
    
    Expand our deposit fee income sources, HWMC fees, and explore new fee income
programs.
  a.
    
    Interest rate risk through our rigorous assessment and applied hedging process.b.
    
    Operational risk through our policies, procedures and related controls.c.
    
    Liquidity Risk through our core deposit development and back up liquidity plans.d.
    
    Credit Risk though our underwriting and problem asset resolution process.
    
 Critical Accounting Policies
 General
  65




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##### Table of Contents



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
 Trading and Investment Portfolio
 Other-Than-Temporary Impairment.
 66




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##### Table of Contents



Goodwill.
 Real Estate Owned.
 Hedging Activity. Accounting for Derivative Instruments and Hedging Activities
 
 Results of Operations
   1)
    
    $5.8 million of after-tax core banking income (net interest income before provision for
loan loss plus banking fee income minus operating expenses);2)
    
    $7.0 million of after-tax other-than-temporary impairments on $17.5 million of securities
held available-for-sale. This loss was transferred from equity to earnings upon
determination of the
other-than-temporary impairment and, therefore, has no effect on book value per share;3)
    
    $6.8 million in after-tax addition to reserves and write-downs on loans and real estate
owned. On a pre-tax basis, this expense includes $7.0 million of provision for loan losses and $4.4
million of write-downs on real estate owned; and4)
    
    $2.8 million of after-tax net losses on AAA-rated commercial mortgage-backed securities
(CMBS) total rate of return swaps, CMBS, CMBS hedges and terminated cash flow swaps, and other
securities, loans and assets.
 Net Interest Income
 67




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68




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##### Table of Contents



Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended2008
    
    
    2007(In thousands)
    
    Balance
    
    
    Income
    
    
    Rate
    
    
    Balance
    
    
    Income
    
    
    RateInterest earning assets:Loans receivable (1)
    
    $
    802,288
    
    
    $
    54,793
    
    
    
    6.83
    %
    
    $
    764,056
    
    
    $
    60,317
    
    
    
    7.90
    %FHLB stock
    
    
    13,077
    
    
    
    530
    
    
    
    4.05
    %
    
    
    13,169
    
    
    
    692
    
    
    
    5.25
    %Securities and trading account assets (2)
    
    
    347,636
    
    
    
    16,634
    
    
    
    4.78
    %
    
    
    320,246
    
    
    
    18,855
    
    
    
    5.89
    %Cash and cash equivalents (3)
    
    
    16,215
    
    
    
    143
    
    
    
    0.88
    %
    
    
    12,020
    
    
    
    260
    
    
    
    2.16
    %Total interest earning assets
    
    
    1,179,216
    
    
    
    72,100
    
    
    
    6.11
    %
    
    
    1,109,491
    
    
    
    80,124
    
    
    
    7.23
    %Non-interest-earning assets
    
    
    42,059
    
    
    
    
    
    
    
    
    
    
    
    51,696Total assets
    
    $
    1,221,275
    
    
    
    
    
    
    
    
    
    
    $
    1,161,187Interest bearing liabilities:Deposits:NOW and money market accounts
    
    $
    156,277
    
    
    $
    3,919
    
    
    
    2.51
    %
    
    $
    100,454
    
    
    $
    2,656
    
    
    
    2.64
    %Passbook accounts and certificates
of deposit
    
    
    671,967
    
    
    
    25,529
    
    
    
    3.80
    %
    
    
    623,088
    
    
    
    30,217
    
    
    
    4.85
    %Total deposits
    
    
    828,244
    
    
    
    29,448
    
    
    
    3.56
    %
    
    
    723,542
    
    
    
    32,873
    
    
    
    4.54
    %FHLB advances (4)
    
    
    233,995
    
    
    
    9,590
    
    
    
    4.10
    %
    
    
    234,544
    
    
    
    11,598
    
    
    
    4.94
    %Reverse repurchase agreements
    
    
    32,865
    
    
    
    1,016
    
    
    
    3.04
    %
    
    
    54,910
    
    
    
    1,723
    
    
    
    3.18
    %Other borrowings (5)
    
    
    25,774
    
    
    
    1,595
    
    
    
    6.09
    %
    
    
    25,774
    
    
    
    2,077
    
    
    
    8.17
    %Total interest-bearing liabilities
    
    
    1,120,878
    
    
    
    41,649
    
    
    
    3.70
    %
    
    
    1,038,770
    
    
    
    48,271
    
    
    
    4.63
    %Non-interest-bearing deposits
    
    
    42,659
    
    
    
    
    
    
    
    
    
    
    
    47,581Non-interest-bearing liabilities
    
    
    11,293
    
    
    
    
    
    
    
    
    
    
    
    8,544Total liabilities
    
    
    1,174,830
    
    
    
    
    
    
    
    
    
    
    
    1,094,895Stockholders equity
    
    
    46,445
    
    
    
    
    
    
    
    
    
    
    
    66,292Total liabilities and stockholders equity
    
    $
    1,221,275
    
    
    
    
    
    
    
    
    
    
    $
    1,161,187Net interest-earning assets (liabilities)
    
    $
    58,338
    
    
    
    
    
    
    
    
    
    
    $
    70,721Net interest income/interest rate spread
    
    
    
    
    
    $
    30,451
    
    
    
    2.41
    %
    
    
    
    
    
    $
    31,853
    
    
    
    2.60
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.59
    %
    
    
    
    
    
    
    
    
    
    
    2.90
    %Ratio of
average interest-earning assets to
    average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    105.20
    %
    
    
    
    
    
    
    
    
    
    
    106.81
    %
 
 (1)
    
    Includes non-accrual loans. Interest income includes fees earned on loans originated and
accretion of deferred loan fees.(2)
    
    Consists of securities classified as available for sale and held to maturity and trading
account assets. Excludes SFAS 115 adjustments to fair value, which are included in other
assets.(3)
    
    Consists of cash and due from banks and federal funds sold.(4)
    
    Interest on FHLB advances is net of hedging costs. We use interest rate swaps to hedge the
short-term re-pricing characteristics of our floating-rate FHLB advances. See Asset and
Liability Management.(5)
    
    Consists of subordinated debt. 69




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##### Table of Contents



Rate/Volume Analysis
  Twelve Months EndedDecember 31, 2008 vs. December 31, 2007Increase (decrease) due to
    
    Total NetRate/
    
    Increase(In thousands)
    
    Rate
    
    Volume
    
    Volume
    
    (Decrease)Increase (decrease) in:Interest -earning assets:Loans receivable (1)
    
    $
    (8,175
    )
    
    $
    3,020
    
    
    $
    (369
    )
    
    $
    (5,524
    )FHLB stock
    
    
    (158
    )
    
    
    (5
    )
    
    
    1
    
    
    
    (162
    )Securities and trading account assets (2)
    
    
    (3,555
    )
    
    
    1,613
    
    
    
    (279
    )
    
    
    (2,221
    )Cash and cash equivalents (3)
    
    
    (154
    )
    
    
    91
    
    
    
    (54
    )
    
    
    (117
    )Total net change in income on
interest-earning assets
    
    
    (12,042
    )
    
    
    4,719
    
    
    
    (701
    )
    
    
    (8,024
    )Interest-bearing liabilities:DepositsNOW and money market accounts
    
    
    (131
    )
    
    
    1,474
    
    
    
    (80
    )
    
    
    1,263Passbook accounts and certificates of deposit
    
    
    (6,542
    )
    
    
    2,371
    
    
    
    (517
    )
    
    
    (4,688
    )Total deposits
    
    
    (6,673
    )
    
    
    3,845
    
    
    
    (597
    )
    
    
    (3,425
    )FHLB advances (4)
    
    
    (1,970
    )
    
    
    (27
    )
    
    
    (11
    )
    
    
    (2,008
    )Reverse Repurchase Agreements
    
    
    (77
    )
    
    
    (701
    )
    
    
    71
    
    
    
    (707
    )Other borrowings (5)
    
    
    (536
    )
    
    
    
    
    
    
    54
    
    
    
    (482
    )Total net
change in expense on interest-bearing liabilities
    
    
    (9,256
    )
    
    
    3,117
    
    
    
    (483
    )
    
    
    (6,622
    )Change in net interest income
    
    $
    (2,786
    )
    
    $
    1,602
    
    
    $
    (218
    )
    
    $
    (1,402
    )
 
 1)
    
    Includes fees earned on loans originated and accretion of deferred loan fees.2)
    
    Consists of interest income from securities classified as available for sale, held to maturity and trading account assets.3)
    
    Consists of interest income from cash and due from banks and federal funds sold.4)
    
    Interest expense on FHLB advances is net of hedging costs.
Hedging costs include interest income and expense and
ineffectiveness adjustments for cash flow hedges. The Company uses
pay-fixed, receive floating LIBOR swaps to
hedge the short term repricing characteristics of the floating FHLB advances.5)
    
    Consists of interest expense on subordinated debt. 70




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Interest Income
 Interest Expense
 Provision for Loan Losses
 Other Income
  Year Ended December 31,2008
    
    2007
    
    2006Net gain (loss) on sale of available-for-sale securities
    
    $
    1,107
    
    
    $
    (1,004
    )
    
    $
    (613
    )Gain (loss) from trading assets
    
    
    (8,699
    )
    
    
    (2,798
    )
    
    
    1,024Other-than-temporary loss
    
    
    (11,824
    )
    
    
    (2,153
    )
    
    
    Gain on termination of cash flow hedge
    
    
    1,889
    
    
    
    
    
    
    
    Loss on write-down of real estate owned
    
    
    (4,442
    )
    
    
    
    
    
    
    Gain (loss) on sale of other assets
    
    
    1,045
    
    
    
    (1
    )
    
    
    (39
    )Increase in cash surrender value of insurance
    
    
    485
    
    
    
    873
    
    
    
    745Banking fee income and other income (1)
    
    
    3,452
    
    
    
    3,453
    
    
    
    3,340Total other income
    
    $
    (16,987
    )
    
    $
    (1,630
    )
    
    $
    4,457
 
 (1)
    
    Consists primarily of banking fee income such as service charges and fees on deposit
accounts, fees from our trust and investment management services, other miscellaneous fees
and increase in cash surrender value of life insurance.  71




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Banking Fee & Other Income
 %
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeBanking Fee TypeMortgage Brokerage Fee, Prepayment
Penalties & Other Loan Fees
    
    $
    608
    
    
    $
    832
    
    
    
    (26.9
    %)
    
    $
    832
    
    
    $
    826
    
    
    
    0.7
    %Deposit, Other Retail Banking Fees & Other
Fee Income
    
    
    1,903
    
    
    
    1,665
    
    
    
    14.3
    %
    
    
    1,665
    
    
    
    1,666
    
    
    
    (0.1
    %)Harrington Wealth Management Fees
    
    
    941
    
    
    
    956
    
    
    
    (1.6
    %)
    
    
    956
    
    
    
    848
    
    
    
    12.7
    %Increase in
Cash Surrender Value of Life Insurance, net



    
    
    485
    
    
    
    873
    
    
    
    (44.4
    %)
    
    
    873
    
    
    
    745
    
    
    
    17.2
    %Total Banking Fee & Other Income
    
    $
    3,937
    
    
    $
    4,326
    
    
    
    (9.0
    %)
    
    $
    4,326
    
    
    $
    4,085
    
    
    
    5.9
    %
  Other Expenses
  Year Ended December 31,2008
    
    2007
    
    2006Salaries and employee benefits
    
    $
    13,372
    
    
    $
    13,157
    
    
    $
    12,478Premises and equipment
    
    
    4,077
    
    
    
    3,875
    
    
    
    3,744Insurance premiums
    
    
    917
    
    
    
    337
    
    
    
    417Marketing
    
    
    512
    
    
    
    418
    
    
    
    453Computer services
    
    
    1,043
    
    
    
    950
    
    
    
    841Professional fees
    
    
    728
    
    
    
    760
    
    
    
    998Office expenses and supplies
    
    
    807
    
    
    
    792
    
    
    
    881Other (1)
    
    
    3,228
    
    
    
    2,635
    
    
    
    2,348Total other expenses
    
    $
    24,684
    
    
    $
    22,924
    
    
    $
    22,160
 
 (1)
    
    Consists primarily of regulatory fees, and other miscellaneous expenses.  72




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##### Table of Contents



Income Taxes
 
 Changes in Financial Condition
 General
 Cash and Cash Equivalents
 Securities.
 Trading Account Assets.
 73




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##### Table of Contents



Loans Receivable.
    Allowance for Loan Losses.
 Deposits.
 74




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##### Table of Contents



Borrowings.
 Subordinated Debt.
 Other Liabilities and Fair Value of Cash Flow Hedges.
 Stockholders Equity
 75




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##### Table of Contents



Asset and Liability Management
      i.e.,
 76




---



##### Table of Contents



Accounting for Derivative Instruments and Hedging Activities,
    77




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78




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Change In Interest Rates (In Basis Points)(1)-300
    
    
    -200
    
    
    -100
    
    
    -
    
    
    +100
    
    
    +200
    
    
    +3002008
    
    (Dollars in Thousands)Market value gain (loss) in assets
    
    $
    29,178
    
    
    $
    25,646
    
    
    $
    13,235
    
    
    
    
    
    
    $
    (15,160
    )
    
    $
    (32,405
    )
    
    $
    (50,735
    )Market value gain (loss) of liabilities
    
    
    (15,422
    )
    
    
    (14,892
    )
    
    
    (8,335
    )
    
    
    
    
    
    
    7,841
    
    
    
    15,584
    
    
    
    24,116Market value gain (loss) of net assets
before interest rate contracts
    
    
    13,756
    
    
    
    10,754
    
    
    
    4,900
    
    
    
    
    
    
    
    (7,319
    )
    
    
    (16,821
    )
    
    
    (26,619
    )Market value gain (loss) of interest
rate contracts
    
    
    (6,672
    )
    
    
    (6,428
    )
    
    
    (3,397
    )
    
    
    
    
    
    
    3,236
    
    
    
    6,346
    
    
    
    9,336Total change in MVPE(2)
    
    $
    7,084
    
    
    $
    4,326
    
    
    $
    1,503
    
    
    
    
    
    
    $
    (4,083
    )
    
    $
    (10,475
    )
    
    $
    (17,283
    )Change in MVPE as a percent of:MVPE(2)
    
    
    10.85
    %
    
    
    6.62
    %
    
    
    2.30
    %
    
    
    
    
    
    
    -6.25
    %
    
    
    -16.04
    %
    
    
    -26.46
    %Total assets of Los Padres Bank
    
    
    0.43
    %
    
    
    0.25
    %
    
    
    0.06
    %
    
    
    
    
    
    
    -0.26
    %
    
    
    -0.74
    %
    
    
    -1.22
    %Change In Interest Rates (In Basis Points)(1)-300
    
    
    -200
    
    
    -100
    
    
    -
    
    
    +100
    
    
    +200
    
    
    +3002007
    
    (Dollars in Thousands)Market value gain (loss) in assets
    
    $
    41,066
    
    
    $
    29,762
    
    
    $
    16,089
    
    
    
    
    
    
    $
    (17,779
    )
    
    $
    (36,760
    )
    
    $
    (56,690
    )Market value gain (loss) of liabilities
    
    
    (26,183
    )
    
    
    (16,276
    )
    
    
    (7,792
    )
    
    
    
    
    
    
    7,307
    
    
    
    14,456
    
    
    
    22,969Market value gain (loss) of net assets
before interest rate contracts
    
    
    14,883
    
    
    
    13,486
    
    
    
    8,297
    
    
    
    
    
    
    
    (10,472
    )
    
    
    (22,304
    )
    
    
    (33,721
    )Market value gain (loss) of interest
rate contracts
    
    
    (14,728
    )
    
    
    (9,599
    )
    
    
    (4,694
    )
    
    
    
    
    
    
    4,494
    
    
    
    8,798
    
    
    
    12,923Total change in MVPE(2)
    
    $
    155
    
    
    $
    3,887
    
    
    $
    3,603
    
    
    
    
    
    
    $
    (5,978
    )
    
    $
    (13,506
    )
    
    $
    (20,798
    )Change in MVPE as a percent of:MVPE(2)
    
    
    0.19
    %
    
    
    4.74
    %
    
    
    4.40
    %
    
    
    
    
    
    
    -7.30
    %
    
    
    -16.49
    %
    
    
    -25.39
    %Total assets of Los Padres Bank
    
    
    -0.19
    %
    
    
    0.16
    %
    
    
    0.21
    %
    
    
    
    
    
    
    -0.40
    %
    
    
    -0.95
    %
    
    
    -1.48
    %
 
 (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on our pre-tax MVPE of $71.4 million at December 31, 2008.  
 Liquidity and Capital Resources
 Liquidity.
  79




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Capital Resources.
 80




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##### Table of Contents



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
    
    $
    676,183
    
    
    $
    663,617
    
    
    $
    9,062
    
    
    $
    3,504
    
    
    $
    FHLB advances
    
    
    190,000
    
    
    
    171,000
    
    
    
    19,000
    
    
    
    
    
    
    
    Reverse repurchase agreements
    
    
    19,499
    
    
    
    4,499
    
    
    
    15,000
    
    
    
    
    
    
    
    Leases
    
    
    3,849
    
    
    
    1,341
    
    
    
    1,805
    
    
    
    703
    
    
    
    Other debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Total contractual
obligations
    
    $
    915,305
    
    
    $
    840,457
    
    
    $
    44,867
    
    
    $
    4,207
    
    
    $
    25,774
 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
    
    $
    37,245
    
    
    $
    33,276
    
    
    $
    2,985
    
    
    $
    981
    
    
    $
    3Consumer lines of credit (1)
    
    
    46,168
    
    
    
    2,235
    
    
    
    641
    
    
    
    
    
    
    
    43,292Undisbursed portion of loans in process
    
    
    27,582
    
    
    
    24,898
    
    
    
    2,671
    
    
    
    
    
    
    
    13Approved, but not funded mortgage loans
    
    
    3,805
    
    
    
    3,805
    
    
    
    
    
    
    
    
    
    
    
    Approved, but not funded consumer loans
    
    
    950
    
    
    
    950
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    750
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    116,500
    
    
    $
    65,914
    
    
    $
    6,297
    
    
    $
    981
    
    
    $
    43,308
 
 (1)
    
    Lines of credit with no stated maturity date are included in commitments for less than
one year. 
 Off-Balance Sheet Arrangements
   81




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##### Table of Contents



Contract or
    
    
    
    Weighted-AverageNotional
    
    Estimated

    
    Interest RateAmount
    
    Fair Value
    
    Receivable
    
    PayableDecember 31, 2008 -
Interest rate swaps  pay fixed
    
    $
    168,000
    
    
    $
    (10,442
    )
    
    
    2.62
    %
    
    
    5.20
    %receive 3-month LIBORDecember 31, 2007 -
Interest rate swaps  pay fixed
    
    $
    172,000
    
    
    $
    (4,979
    )
    
    
    5.02
    %
    
    
    5.17
    %receive 3-month LIBOR
  Maturities
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    70,000
    
    
    $
    30,000
    
    
    $
    30,000
    
    
    $
    10,000
    
    
    $
    18,000
    
    
    $
    10,000Weighted-average
payable rate
    
    
    5.20
    %
    
    
    5.63
    %
    
    
    5.05
    %
    
    
    5.46
    %
    
    
    4.97
    %
    
    
    4.59
    %Weighted-average
receivable rate
    
    
    2.22
    %
    
    
    3.06
    %
    
    
    2.20
    %
    
    
    4.50
    %
    
    
    2.19
    %
    
    
    1.43
    %
 
 Inflation and Changing Prices
  
 See Effect of Newly Issued But Not Yet Effective Accounting Standards included in Footnote 1.
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .
  
 Item 8. Financial Statements and Supplementary Data.
  82




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PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    84CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Statements of Financial Condition
December 31, 2008 and 2007
    
    
    85Consolidated Statements of Earnings (Loss) for the
Years Ended December 31, 2008 and 2007
    
    
    86Consolidated Statements of Stockholders Equity and Comprehensive Loss for the
Years Ended December 31, 2008 and 2007
    
    
    87Consolidated Statements of Cash Flows for the
Years Ended December 31, 2008 and 2007
    
    
    89Notes to Consolidated Financial Statements
    
    
    91
 83




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ Crowe Horwath LLPSherman Oaks, CaliforniaMarch 30,2009
 84




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##### Table of Contents



HARRINGTON
WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
 December 31,2008
    
    
    2007Assets:Cash and cash equivalents
    
    $
    27,040
    
    
    $
    14,433Trading account assets
    
    
    744
    
    
    
    2,307Securities, available-for-sale
    
    
    273,678
    
    
    
    351,466Securities held to maturity (fair value of $38 in 2008 and $58 in 2007)
    
    
    37
    
    
    
    56Loans
receivable, net of allowance for loan losses of $11,449 in 2008 and $6,446 in 2007
    
    
    798,325
    
    
    
    782,626Accrued interest receivable
    
    
    3,897
    
    
    
    5,168Real estate owned
    
    
    7,449
    
    
    
    Premises, equipment and other long-term assets
    
    
    17,732
    
    
    
    16,917Due from broker
    
    
    
    
    
    
    1Prepaid expenses and other assets
    
    
    3,254
    
    
    
    2,848Investment in FHLB stock, at cost
    
    
    11,501
    
    
    
    12,474Income taxes receivable
    
    
    1,468
    
    
    
    Cash surrender value of life insurance
    
    
    23,712
    
    
    
    20,524Deferred tax asset
    
    
    20,748
    
    
    
    8,384Goodwill
    
    
    5,496
    
    
    
    5,496Other intangible assets
    
    
    554
    
    
    
    702Total assets
    
    $
    1,195,635
    
    
    $
    1,223,402Liabilities:Deposits:Interest-bearing deposits
    
    $
    853,523
    
    
    $
    786,263Non-interest-bearing demand deposits
    
    
    46,070
    
    
    
    50,070Total deposits
    
    
    899,593
    
    
    
    836,333FHLB advances
    
    
    190,000
    
    
    
    247,000Securities sold under repurchase agreements
    
    
    19,499
    
    
    
    49,981Subordinated debt
    
    
    25,774
    
    
    
    25,774Accrued interest payable and other liabilities
    
    
    14,331
    
    
    
    8,769Income taxes payable
    
    
    
    
    
    
    503Total liabilities
    
    
    1,149,197
    
    
    
    1,168,360Commitments and contingencies (Note 14)Stockholders equityPreferred stock, $.01 par value; 8% non-cumulative, 5,000,000 shares authorized;
142,999 shares issued and outstanding as of December 31, 2008
with no shares issued and outstanding December 31, 2007
Liquidation preference of $3.6 million at December 31, 2008
    
    
    2
    
    
    
    Common stock, $.01 par value; 15,000,000 shares authorized;
6,770,093 shares issued and outstanding as of December 31, 2008
and 5,554,003 shares issued and outstanding December 31, 2007
    
    
    72
    
    
    
    56Additional paid-in capital  Common
    
    
    45,437
    
    
    
    34,424Additional paid-in capital  Preferred
    
    
    4,649
    
    
    
    Stock subscriptions
    
    
    (3,857
    )
    
    
    Retained earnings
    
    
    23,356
    
    
    
    35,368Accumulated other comprehensive loss
    
    
    (23,221
    )
    
    
    (14,806
    )Total stockholders equity
    
    
    46,438
    
    
    
    55,042Total liabilities and stockholders equity
    
    $
    1,195,635
    
    
    $
    1,223,402See notes to consolidated financial statements.
 85




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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
 (Dollars in thousands, except share and per share data)
 Year EndedDecember 312008
    
    
    2007Interest income:Loans
    
    $
    54,793
    
    
    $
    60,317Securities
    
    
    17,307
    
    
    
    19,807Total interest income
    
    
    72,100
    
    
    
    80,124Interest expense:Deposits
    
    
    29,448
    
    
    
    32,873Interest on FHLB advances, repos & other debt
    
    
    12,201
    
    
    
    15,398Total interest expense
    
    
    41,649
    
    
    
    48,271Net interest income
    
    
    30,451
    
    
    
    31,853Provision for loan losses
    
    
    6,990
    
    
    
    650Net interest income after provision for loan losses
    
    
    23,461
    
    
    
    31,203Non-interest income:Gain (loss) on sale of available for sale securities
    
    
    1,107
    
    
    
    (1,004
    )Loss from trading assets
    
    
    (8,699
    )
    
    
    (2,798
    )Other-than-temporary loss
    
    
    (11,824
    )
    
    
    (2,153
    )Gain on termination of cash flow hedge
    
    
    1,889
    
    
    
    Loss on write-down of real estate owned
    
    
    (4,442
    )
    
    
    Gain (loss) on sale of other assets
    
    
    1,045
    
    
    
    (1
    )Increase in cash surrender value of life insurance
    
    
    485
    
    
    
    873Banking fee and other income
    
    
    3,452
    
    
    
    3,453Total non-interest income
    
    
    (16,987
    )
    
    
    (1,630
    )Non-interest expense:Salaries and employee benefits
    
    
    13,372
    
    
    
    13,157Premises and equipment
    
    
    4,077
    
    
    
    3,875Insurance premiums
    
    
    917
    
    
    
    337Marketing
    
    
    512
    
    
    
    418Computer services
    
    
    1,043
    
    
    
    950Professional fees
    
    
    728
    
    
    
    760Office expenses and supplies
    
    
    807
    
    
    
    792Other
    
    
    3,228
    
    
    
    2,635Total non-interest expense
    
    
    24,684
    
    
    
    22,924Income (loss) before income taxes
    
    
    (18,210
    )
    
    
    6,649Provision for income tax expense (benefit)
    
    
    (7,400
    )
    
    
    2,481Net income (loss)
    
    
    (10,810
    )
    
    
    4,168Dividend on preferred stock
    
    
    61
    
    
    
    Income (loss) available to common shareholders
    
    $
    (10,871
    )
    
    $
    4,168Basic earnings/(loss) per share
    
    $
    (1.78
    )
    
    $
    0.75Diluted earnings/(loss) per share
    
    $
    (1.78
    )
    
    $
    0.74Basic weighted-average shares outstanding
    
    
    6,115,540
    
    
    
    5,541,840Diluted weighted-average shares outstanding
    
    
    6,115,540
    
    
    
    5,637,415
  86




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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY and COMPREHENSIVE LOSS
 (Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Subscriptions
    
    
    Earnings
    
    
    Loss
    
    
    Loss
    
    
    EquityBALANCE,
JANUARY 1, 2007
    
    
    
    
    
    $
    
    
    
    
    5,460,393
    
    
    $
    55
    
    
    $
    33,332
    
    
    $
    
    
    
    $
    34,964
    
    
    
    
    
    
    $
    (653
    )
    
    $
    67,698Comprehensive income/(loss)Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,168
    
    
    
    4,168
    
    
    
    
    
    
    
    4,168Other comprehensive loss, net of taxUnrealized losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,757
    )
    
    
    (10,757
    )
    
    
    (10,757
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,396
    )
    
    
    (3,396
    )
    
    
    (3,396
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (9,985
    )Stock options exercised
including tax benefit of $125
    
    
    
    
    
    
    
    
    
    
    93,610
    
    
    
    1
    
    
    
    719
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    720Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    373Dividends on Common
stock at $.675 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,764
    )
    
    
    
    
    
    
    
    
    
    
    (3,764
    )BALANCE, DECEMBER 31, 2007
    
    
    
    
    
    
    
    
    
    
    5,554,003
    
    
    
    56
    
    
    
    34,424
    
    
    
    
    
    
    
    35,368
    
    
    
    
    
    
    
    (14,806
    )
    
    
    55,042Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,810
    )
    
    $
    (10,810
    )
    
    
    
    
    
    
    (10,810
    )Other comprehensive loss, net of taxUnrealized losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,350
    )
    
    
    (5,350
    )
    
    
    (5,350
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,065
    )
    
    
    (3,065
    )
    
    
    (3,065
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (19,225
    )Stock options exercised
including tax benefit of $25
    
    
    
    
    
    
    
    
    
    
    27,240
    
    
    
    
    
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233Common shares issued in
private offering at $7.75
    
    
    
    
    
    
    
    
    
    
    550,000
    
    
    
    5
    
    
    
    4,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,262Common shares issued in
private offering at $6.25
    
    
    
    
    
    
    
    
    
    
    638,850
    
    
    
    11
    
    
    
    6,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,164Preferred shares issued in
private offering at $25.00
    
    
    142,999
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,651Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Stock subscriptions unissued:Preferred stock 54,001
shares at $25.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )Common stock 401,150
shares at $6.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,507
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,507
    )Dividends on preferred
stock at 8% per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Dividends on common
stock at $.195 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,141
    )
    
    
    
    
    
    
    
    
    
    
    (1,141
    )BALANCE, DECEMBER 31, 2008
    
    
    142,999
    
    
    $
    2
    
    
    
    6,770,093
    
    
    $
    72
    
    
    $
    50,086
    
    
    $
    (3,857
    )
    
    $
    23,356
    
    
    
    
    
    
    $
    (23,221
    )
    
    $
    46,438
  87




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HARRINGTON WEST FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY and COMPREHENSIVE LOSS
(Dollars in thousands)
 December 31,2008
    
    
    2007DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding loss arising during period,
net of benefit of ($7,189), and (7,686) for
2008, and 2007, respectively
    
    $
    (12,056
    )
    
    $
    (12,730
    )Less: Reclassification adjustment for losses included
in net income, net of tax benefit of ($4,011), and ($1,184)
for 2008, and 2007, respectively
    
    
    (6,706
    )
    
    
    (1,973
    )Net unrealized loss on securities, net of tax benefit
of ($3,178), and ($6,502) for 2008, and 2007, respectively
    
    $
    (5,350
    )
    
    $
    (10,757
    )Unrealized net loss on cash flow hedges, net of tax benefit
of ($1,223), and ($2,171) for 2008, and 2007 , respectively
    
    $
    (1,914
    )
    
    $
    (3,395
    )Less: Reclassification adjustment for amortization on terminated swaps
and net gain on cash flow hedges included in net income, net of tax
expense of $736, and $1 for 2008, and 2007 ,
respectively
    
    
    1,151
    
    
    
    1Net unrealized loss on cash flow hedges, net of tax benefit
of ($1,959), and ($2,171) for 2008, and 2007, respectively
    
    $
    (3,065
    )
    
    $
    (3,396
    )Total change in Accumulated Other Comprehensive Loss
    
    $
    (8,415
    )
    
    $
    (14,153
    )
  88




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 Year EndedDecember 31,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (10,810
    )
    
    $
    4,168Adjustments to reconcile net income (loss) to net cash provided by operating activities:Accretion of deferred loan fees and costs
    
    
    (646
    )
    
    
    (238
    )Depreciation and amortization
    
    
    1,386
    
    
    
    1,485Amortization and accretion of premiums and discounts on loans
receivable and securities
    
    
    (777
    )
    
    
    540Deferred income taxes
    
    
    (7,243
    )
    
    
    (1,045
    )Provision for loan losses
    
    
    6,990
    
    
    
    650Activity in trading account assets
    
    
    (1,125
    )
    
    
    (6
    )Loss (gain) on sale of trading securities
    
    
    2,688
    
    
    
    (1,464
    )Loss (gain) on sale of available-for-sale securities
    
    
    (1,107
    )
    
    
    1,004Gain on termination of cash flow swaps
    
    
    (1,889
    )
    
    
    Loss on other-than-temporary impairment
    
    
    11,824
    
    
    
    2,153Loss on write-down of real estate owned
    
    
    4,442
    
    
    
    Loss (gain) on sale of loans
    
    
    (252
    )
    
    
    Loss (gain) on sale of premises and equipment
    
    
    (793
    )
    
    
    FHLB stock dividend
    
    
    (697
    )
    
    
    (726
    )Earnings on bank owned life insurance
    
    
    (485
    )
    
    
    (873
    )Decrease in accrued interest receivable
    
    
    1,271
    
    
    
    147(Increase) decrease in income taxes receivable, net of payable
    
    
    (1,971
    )
    
    
    615(Increase) decrease in prepaid expenses and other assets
    
    
    8,239
    
    
    
    1,151Stock compensation expense
    
    
    233
    
    
    
    373Increase (decrease) in accounts payable, accrued expenses,
and other liabilities
    
    
    (6,234
    )
    
    
    (429
    )Net cash provided (used) by operating activities
    
    
    3,044
    
    
    
    7,505Cash flows from investing activities:Net increase in loans receivable
    
    
    (49,845
    )
    
    
    (26,074
    )Proceeds from sale of loans
    
    
    16,133
    
    
    
    Proceeds from sales of securities available for sale
    
    
    171,925
    
    
    
    35,999Purchases of securities available for sale
    
    
    (162,501
    )
    
    
    (197,533
    )Principal paydowns on securities available for sale
    
    
    49,892
    
    
    
    98,915Principal paydowns on securities held to maturity
    
    
    19
    
    
    
    13Purchase of cash surrender value of life insurance
    
    
    (2,750
    )
    
    
    (2,000
    )Proceeds from life insurance death benefit
    
    
    
    
    
    
    779Proceeds from sale of real estate acquired through foreclosure
    
    
    53
    
    
    
    Proceeds from sale of fixed assets
    
    
    1,100
    
    
    
    Purchases of premises and equipment
    
    
    (2,360
    )
    
    
    (2,588
    )Redemption of FHLB Stock
    
    
    1,670
    
    
    
    2,867Net cash provided (used) in investing activities
    
    
    23,336
    
    
    
    (89,622
    )
 89




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Year EndedDecember 31,2008
    
    
    2007Cash flows from financing activities:Net increase in deposits
    
    
    63,260
    
    
    
    103,576Decrease in securities sold under agreements to repurchase
    
    
    (30,482
    )
    
    
    (15,160
    )Decrease in FHLB advances
    
    
    (57,000
    )
    
    
    (10,000
    )Proceeds from exercise of stock options, including tax benefits
    
    
    370
    
    
    
    720Proceeds from shares issued in private offerings
    
    
    11,220
    
    
    
    Dividends paid on common stock
    
    
    (1,141
    )
    
    
    (3,764
    )Net cash provided (used) by financing activities
    
    
    (13,773
    )
    
    
    75,372Net (decrease) increase in cash and cash equivalents
    
    
    12,607
    
    
    
    (6,745
    )Cash and cash equivalents at beginning of period
    
    
    14,433
    
    
    
    21,178Cash and cash equivalents at end of period
    
    $
    27,040
    
    
    $
    14,433See notes to consolidated financial statements.SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -Cash paid during the period for:Interest
    
    $
    37,871
    
    
    $
    49,457Income taxes
    
    $
    1,790
    
    
    $
    2,671SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES -Due from broker
    
    $
    
    
    
    $
    (1
    )Transfers from loans to real estate owned
    
    $
    11,096
    
    
    $
    
 90




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business of the Company
  Basis of Presentation
 Principles of Consolidation Consolidation of Variable Interest Entities
 Use of Estimates
 Segments 
 91




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##### Table of Contents



Cash and Cash Equivalents
 Trading Account Assets
 Available for Sale Securities
  Held to Maturity Securities
 Temporary vs. Other-Than-Temporary Impairment e.g.
  92




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##### Table of Contents



Loans Receivable
 Loan Interest Income and Fees
   Concentration of Credit Risk 
 Allowance for Loan Losses
  Accounting by Creditors for Impairment of a Loan
  93




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##### Table of Contents



Loan Commitments and Related Financial Instruments
 Real Estate Owned
 Transfers of Financial Assets
 Premises and Equipment
  Income Taxes
 Accounting for Uncertainty in Income Taxes
  Investment in Federal Home Loan Bank of San Francisco Stock 
 94




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##### Table of Contents



Cash Surrender Value of Life Insurance
 Core Deposit Intangibles
 Goodwill
 Long-Term Assets
 Derivatives Held for Asset and Liability Management Purposes Accounting for
Derivative Instruments and Hedging Activities
   Securities Sold Under Repurchase Agreements
 95




---



##### Table of Contents



Earnings Per Common Share
 Preferred stock
 Comprehensive Loss 
 Loss Contingencies
 Restrictions on Cash -
 Dividend Restriction
 Fair Value of Financial Instruments
  Cash Flows
 Stock-Based Compensation
 Adoption of new accounting standards:
 Fair Value Measurements
 96




---



##### Table of Contents



Effective
Date of FASB Statement No. 157.
 Determining the Fair Value of a
Financial Asset when the Market for That Asset Is Not Active.
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements
 Written Loan Commitments
Recorded at Fair Value through Earnings Application of Accounting
Principles to Loan Commitments
  97




---



##### Table of Contents



Newly Issued, But Not Yet Effective Accounting Standards
  Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB No. 51
  98




---



##### Table of Contents



2. LOANS RECEIVABLE
  2008
    
    
    2007Real estate loans:Residential property  one to four units
    
    $
    139,326
    
    
    $
    125,545Residential property  more than four units
    
    
    85,176
    
    
    
    82,717Residential property  construction
    
    
    32,709
    
    
    
    49,051Nonresidential property  construction
    
    
    93,015
    
    
    
    77,396Commercial and other income  producing properties
    
    
    260,875
    
    
    
    266,345Loans for the acquisition and development of land
    
    
    48,546
    
    
    
    45,278Total real estate loans
    
    
    659,647
    
    
    
    646,332Commercial and industrial loans
    
    
    118,855
    
    
    
    117,842Consumer loans
    
    
    29,807
    
    
    
    24,483Loans collateralized by deposits and for executive line of credit
    
    
    2,865
    
    
    
    2,486Consumer line-of-credit loans
    
    
    269
    
    
    
    267811,443
    
    
    
    791,410Net deferred loan fees
    
    
    (1,219
    )
    
    
    (1,865
    )Net (discount) premiums
    
    
    (450
    )
    
    
    (473
    )Allowance for loan losses
    
    
    (11,449
    )
    
    
    (6,446
    )Loans receivable, net
    
    $
    798,325
    
    
    $
    782,626
  2008
    
    
    2007Balance, beginning of year
    
    $
    6,446
    
    
    $
    5,914Charge-offs
    
    
    (2,012
    )
    
    
    (119
    )Recoveries
    
    
    25
    
    
    
    1Provision for loan losses
    
    
    6,990
    
    
    
    650Balance, end of year
    
    $
    11,449
    
    
    $
    6,446
 99




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##### Table of Contents



At December 31,2008
    
    
    2007Impaired loans with a valuation allowance
    
    $
    13,330
    
    
    $
    8,296Impaired loans without a valuation allowance
    
    
    31,794
    
    
    
    1,191Total impaired loans
    
    $
    45,124
    
    
    $
    9,487Valuation allowance related to impaired loans
    
    $
    4,548
    
    
    $
    4402008
    
    
    2007Average recorded investment in impaired loans
    
    $
    22,595
    
    
    $
    9,330Interest income recognized on impaired loans
    
    
    1
    
    
    
    141Interest income recognized on a cash basis
    
    
    
    
    
    
    
 
 2008
    
    
    2007Troubled debt restructurings
    
    $
    9,422
    
    
    $
    Unfunded commitments on troubled debt restructurings
    
    
    
    
    
    
    $
    9,422
    
    
    $
    
  2008
    
    
    2007Commercial lines of credit
    
    $
    37,245
    
    
    $
    46,725Consumer lines of credit
    
    
    46,168
    
    
    
    48,809Undisbursed portion of loans in process
    
    
    27,582
    
    
    
    74,245Approved, but not funded mortgage loans
    
    
    3,805
    
    
    
    26,239Approved, but not funded commercial loans
    
    
    
    
    
    
    2,927Approved, but not funded consumer loans
    
    
    950
    
    
    
    791Letters of credit
    
    
    750
    
    
    
    1,325Total Commitments
    
    $
    116,500
    
    
    $
    201,061
  100




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##### Table of Contents



3. SECURITIES
  Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    50,284
    
    
    $
    315
    
    
    $
    (317
    )
    
    $
    50,282Collateralized mortgage obligations
    
    
    83,376
    
    
    
    
    
    
    
    (6,140
    )
    
    
    77,236Asset-backed securities (underlying
securities mortgages)
    
    
    165,721
    
    
    
    748
    
    
    
    (21,010
    )
    
    
    145,459Asset-backed securities
    
    
    1,655
    
    
    
    
    
    
    
    (954
    )
    
    
    701$
    301,036
    
    
    $
    1,063
    
    
    $
    (28,421
    )
    
    $
    273,678
 Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2007Mortgage-backed securities  pass throughs
    
    $
    69,570
    
    
    $
    144
    
    
    $
    (613
    )
    
    $
    69,101Collateralized mortgage obligations
    
    
    114,101
    
    
    
    1,024
    
    
    
    (3,320
    )
    
    
    111,805Asset-backed securities (underlying securities mortgages)
    
    
    184,724
    
    
    
    333
    
    
    
    (16,235
    )
    
    
    168,822Asset-backed securities
    
    
    1,900
    
    
    
    5
    
    
    
    (167
    )
    
    
    1,738$
    370,295
    
    
    $
    1,506
    
    
    $
    (20,335
    )
    
    $
    351,466
  Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    38,969
    
    
    $
    (109
    )
    
    $
    10,998
    
    
    $
    (208
    )
    
    $
    49,967
    
    
    $
    (317
    )Collateralized mortgage obligations
    
    
    55,514
    
    
    
    (4,215
    )
    
    
    21,722
    
    
    
    (1,925
    )
    
    
    77,236
    
    
    
    (6,140
    )Asset-backed securities (underlying securities mortgages)
    
    
    17,144
    
    
    
    (1,504
    )
    
    
    127,567
    
    
    
    (19,506
    )
    
    
    144,711
    
    
    
    (21,010
    )Asset-backed securities (DVI & Other)
    
    
    12
    
    
    
    (72
    )
    
    
    689
    
    
    
    (882
    )
    
    
    701
    
    
    
    (954
    )$
    111,639
    
    
    $
    (5,900
    )
    
    $
    160,976
    
    
    $
    (22,521
    )
    
    $
    272,615
    
    
    $
    (28,421
    )
 101




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##### Table of Contents



Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDecember 31, 2007Mortgage-backed securities  pass throughs
    
    $
    22,345
    
    
    $
    (194
    )
    
    $
    23,828
    
    
    $
    (419
    )
    
    $
    46,173
    
    
    $
    (613
    )Collateralized mortgage obligations
    
    
    59,722
    
    
    
    (3,316
    )
    
    
    1,843
    
    
    
    (4
    )
    
    
    61,565
    
    
    
    (3,320
    )Asset-backed securities (underlying securities mortgages)
    
    
    142,635
    
    
    
    (15,621
    )
    
    
    3,082
    
    
    
    (614
    )
    
    
    145,717
    
    
    
    (16,235
    )Asset-backed securities
    
    
    1,599
    
    
    
    (167
    )
    
    
    
    
    
    
    
    
    
    
    1,599
    
    
    
    (167
    )$
    226,301
    
    
    $
    (19,298
    )
    
    $
    28,753
    
    
    $
    (1,037
    )
    
    $
    255,054
    
    
    $
    (20,335
    )
       102




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##### Table of Contents



Securities held to maturity
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMortgage-backed securities
    
    $
    37
    
    
    $
    1
    
    
    $
    
    
    
    $
    38Total
    
    $
    37
    
    
    $
    1
    
    
    $
    
    
    
    $
    38
 103




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##### Table of Contents



Securities held to maturity
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMortgage-backed securities
    
    $
    56
    
    
    $
    2
    
    
    $
    
    
    
    $
    58Total
    
    $
    56
    
    
    $
    2
    
    
    $
    
    
    
    $
    58
 4. PREMISES AND EQUIPMENT
  2008
    
    
    2007Land
    
    $
    4,832
    
    
    $
    4,873Office building/REI
    
    
    9,200
    
    
    
    8,203Leasehold improvements
    
    
    3,840
    
    
    
    3,644Furniture, fixtures and equipment
    
    
    7,655
    
    
    
    7,156Total
    
    
    25,527
    
    
    
    23,876Less: accumulated depreciation and amortization
    
    
    7,795
    
    
    
    6,959Premises and equipment, net
    
    $
    17,732
    
    
    $
    16,917
  104




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5. DEPOSITS
  2008
    
    
    2007Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageAmount
    
    
    Interest Rate (1)
    
    
    Amount
    
    
    Interest Rate (1)Noninterest bearing:Noninterest bearing
    
    $
    9,146
    
    
    
    
    
    
    $
    10,279
    
    
    
    Commercial noninterest bearing
    
    
    36,924
    
    
    
    
    
    
    
    39,791
    
    
    
    Total noninterest bearing
    
    
    46,070
    
    
    
    
    
    
    
    50,070
    
    
    
    Interest bearing:Passbook
    
    
    15,875
    
    
    
    0.62
    %
    
    
    15,581
    
    
    
    0.80
    %NOW Accounts
    
    
    41,324
    
    
    
    1.23
    %
    
    
    34,921
    
    
    
    0.99
    %Money market
    
    
    106,683
    
    
    
    2.66
    %
    
    
    12,750
    
    
    
    2.78
    %Commercial money market
    
    
    13,458
    
    
    
    1.32
    %
    
    
    61,924
    
    
    
    3.75
    %Total interest bearing
    
    
    177,340
    
    
    
    2.04
    %
    
    
    125,176
    
    
    
    2.51
    %Total
    
    
    223,410
    
    
    
    1.62
    %
    
    
    175,246
    
    
    
    1.80
    %Certificates of deposits:$100,000 or greater
    
    
    426,544
    
    
    
    3.30
    %
    
    
    396,559
    
    
    
    4.84
    %Under $100,000
    
    
    249,639
    
    
    
    3.20
    %
    
    
    264,528
    
    
    
    4.78
    %Total certificates of deposits
    
    
    676,183
    
    
    
    3.26
    %
    
    
    661,087
    
    
    
    4.81
    %Total deposits
    
    $
    899,593
    
    
    
    2.86
    %
    
    $
    836,333
    
    
    
    4.18
    %
 
 (1)
    
    Weighted average interest rate as of the end of the period.  $100,000 or
    
    
    Less thanGreater
    
    
    $100,000
    
    
    Total2009
    
    $
    420,189
    
    
    $
    243,428
    
    
    $
    663,6172010
    
    
    2,501
    
    
    
    3,287
    
    
    
    5,7882011
    
    
    1,678
    
    
    
    1,596
    
    
    
    3,2742012
    
    
    1,828
    
    
    
    953
    
    
    
    2,7812013 & Beyond
    
    
    348
    
    
    
    375
    
    
    
    723$
    426,544
    
    
    $
    249,639
    
    
    $
    676,183
 6. FEDERAL HOME LOAN BANK & FEDERAL RESERVE BOARD ADVANCES
  105




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(Dollars in Thousands)


    20082008 - overnight
    
    $
    171,0002010 - long term
    
    
    19,000$
    190,000
 At or For the Year EndedDecember 31,2008
    
    2007(Dollars in Thousands)Overnight FHLB advances:Average balance outstanding during the year
    
    $
    214,987
    
    
    $
    215,544Maximum amount outstanding at any month-end during the year
    
    
    250,000
    
    
    
    262,000Balance outstanding at end of period
    
    
    171,000
    
    
    
    228,000Average interest rate during the period
    
    
    2.22
    %
    
    
    5.18
    %Average interest rate at end of period
    
    
    0.05
    %
    
    
    4.27
    %
 7. NOTE PAYABLE
  8. SUBORDINATED DEBT
   106




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##### Table of Contents



December 31,Series
    
    2008 & 2007
    
    
    Index and SpreadHarrington West Capital Trust I
    
    $
    15,464
    
    
    3 Mo. Libor + 2.85%Harrington West Capital Trust II
    
    
    10,310
    
    
    3 Mo. Libor + 1.90%Total
    
    $
    25,774
 Rate at December 31, 2008
    
    Issuance Date
    
    Maturity DateHarrington West Capital Trust I
    
    
    7.67
    %
    
    
    09/25/03
    
    
    
    10/08/33Harrington West Capital Trust II
    
    
    6.72
    %
    
    
    09/27/04
    
    
    
    10/07/34
 9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
   107




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##### Table of Contents



Year ended December 31,2008
    
    2007Short-term securities sold under agreements to repurchase:Average balance outstanding
    
    $
    5,119
    
    
    $
    5,576Maximum amount outstanding at any month-end during the period
    
    
    6,229
    
    
    
    6,729Balance outstanding at end of period
    
    
    4,499
    
    
    
    4,981Average interest rate during the period
    
    
    2.29
    %
    
    
    3.61
    %Average interest rate at end of period
    
    
    2.04
    %
    
    
    3.32
    %Wholesale repurchase agreements:Average balance outstanding
    
    $
    27,746
    
    
    $
    49,334Maximum amount outstanding at any month-end during the period
    
    
    45,000
    
    
    
    59,000Balance outstanding at end of period
    
    
    15,000
    
    
    
    45,000Average interest rate during the period
    
    
    3.30
    %
    
    
    3.13
    %Average interest rate at end of period
    
    
    3.45
    %
    
    
    3.11
    %
 108




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##### Table of Contents



10. INCOME TAXES
  2008
    
    
    2007Current tax expense:Federal
    
    $
    (835
    )
    
    $
    2,865State
    
    
    678
    
    
    
    661(157
    )
    
    
    3,526Deferred tax expense / (benefit):Federal
    
    
    (5,514
    )
    
    
    (784
    )State
    
    
    (1,729
    )
    
    
    (261
    )(7,243
    )
    
    
    (1,045
    )$
    (7,400
    )
    
    $
    2,481
  2008
    
    
    2007Federal income taxes at statutory rates
    
    
    (35.0
    )%
    
    
    35.0
    %Increase resulting from:State tax, net of federal benefit
    
    
    (3.8
    )%
    
    
    3.9
    %Earnings from bank owned life insurance
    
    
    (0.9
    )%
    
    
    (4.6
    %)Other, net
    
    
    (0.9
    )%
    
    
    3.0
    %Actual tax rate
    
    
    (40.6
    )%
    
    
    37.3
    %
 109




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##### Table of Contents



2008
    
    
    2007Deferred tax asset:Unrealized hedging loss on cash flow hedges
    
    $
    3,980
    
    
    $
    2,032Unrealized loss on available for sale securities
    
    
    10,239
    
    
    
    7,061Allowance for loan losses
    
    
    4,923
    
    
    
    2,772State tax
    
    
    
    
    
    
    269Deferred rent
    
    
    135
    
    
    
    91Real estate owned reserves
    
    
    54
    
    
    
    Terminated cash flow swaps
    
    
    234
    
    
    
    Other-than-temporary loss on available for sale securities
    
    
    6,010
    
    
    
    926Other
    
    
    125Gross deferred tax asset
    
    
    25,700
    
    
    
    13,151Deferred tax liabilities:Net loan fees/costs
    
    
    3,129
    
    
    
    3,115FHLB stock dividends
    
    
    1,134
    
    
    
    1,369State tax
    
    
    547Depreciation
    
    
    142
    
    
    
    96Other
    
    
    
    
    
    
    187Gross deferred tax liability
    
    
    4,952
    
    
    
    4,767Net deferred tax asset
    
    $
    20,748
    
    
    $
    8,384
  11. STOCK BASED COMPENSATION
  Qualified Stock Option Plan
 2005 Equity Based Compensation Plan 
 110




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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.
    
    the right to acquire stock may not remain outstanding more than 10 years after
the grant date, and any ISO Award granted to any eligible employee owning more than
10% of the Companys stock must be granted at 110% of the fair market value of the
stock. Awards do not vest or become exercisable until six months after the date of
grant.
 111




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##### Table of Contents



Year Ended December 31,2008
    
    2007Risk-free interest rate
    
    
    3.29
    %
    
    
    4.63
    %Expected volatility
    
    
    25.66
    %
    
    
    20.45
    %Expected lives
    
    6.25
    years
    
    7
    yearsContractual lives
    
    10
    years
    
    10
    yearsDividend Yield
    
    
    3.12
    %
    
    
    2.90
    %
  2008
    
    2007Intrinsic value of options exercised
    
    $
    77
    
    
    $
    1,044Cash received from option exercises
    
    
    208
    
    
    
    595Tax benefit realized from option exercises
    
    
    25
    
    
    
    125Weighted average fair value of options granted
    
    
    2.26
    
    
    
    3.64
  2008Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    Intrinsic($ in Thousands Except Per Share Information)
    
    Shares
    
    
    Price
    
    
    Life
    
    
    ValueStock options:Outstanding beginning of year
    
    
    678,255
    
    
    $
    12.95Granted
    
    
    139,500
    
    
    $
    10.75Forfeited, expired during the period
    
    
    (79,400
    )
    
    $
    15.91Exercised
    
    
    (27,240
    )
    
    $
    7.63Outstanding, end of the period
    
    
    711,115
    
    
    $
    13.14
    
    
    
    6.02
    
    
    $
    Vested or expected to vest at 12/31/08
    
    
    687,617
    
    
    $
    13.10
    
    
    
    5.95
    
    
    $
    Exercisable, end of the period
    
    
    424,552
    
    
    $
    12.57
    
    
    
    4.45
    
    
    $
    
 112




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12. REGULATORY CAPITAL REQUIREMENTS
       113




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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, 2008:Total Capital(to risk weighted assets)
    
    $
    94,485
    
    
    
    10.21
    %
    
    $
    74,066
    
    
    
    3
    
    
    
    8.00
    %
    
    $
    92,583
    
    
    
    3
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    87,584
    
    
    
    7.24
    %
    
    $
    48,387
    
    
    
    3
    
    
    
    4.00
    %
    
    $
    60,484
    
    
    
    3
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    87,584
    
    
    
    7.24
    %
    
    $
    18,145
    
    
    
    3
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    87,584
    
    
    
    9.46
    %
    
    $
    37,033
    
    
    
    3
    
    
    
    4.00
    %
    
    $
    55,550
    
    
    
    3
    
    
    
    6.00
    %As of December 31, 2007:Total Capital(to risk weighted assets)
    
    $
    91,757
    
    
    
    10.45
    %
    
    $
    70,273
    
    
    
    3
    
    
    
    8.00
    %
    
    $
    87,841
    
    
    
    3
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    85,457
    
    
    
    6.93
    %
    
    $
    49,351
    
    
    
    3
    
    
    
    4.00
    %
    
    $
    61,688
    
    
    
    3
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    85,457
    
    
    
    6.93
    %
    
    $
    18,506
    
    
    
    3
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    85,457
    
    
    
    9.73
    %
    
    $
    35,136
    
    
    
    3
    
    
    
    4.00
    %
    
    $
    52,704
    
    
    
    3
    
    
    
    6.00
    %
 114




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13. EARNINGS (LOSS) PER COMMON SHARE
  Year ended December 31, 2008(net income/(loss) amounts
    
    Income/(Loss)
    
    
    Preferred
    
    
    Shares
    
    
    Per-Sharein thousands)
    
    (Numerator)
    
    
    Dividends
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    (10,810
    )
    
    $
    61
    
    
    
    6,115,540
    
    
    $
    (1.78
    )Effect of dilutive
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    (10,810
    )
    
    $
    61
    
    
    
    6,115,540
    
    
    $
    (1.78
    )
 Year ended December 31, 2007Income/(Loss)
    
    
    Preferred
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    Dividends
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    4,168
    
    
    $
    
    
    
    
    5,541,840
    
    
    $
    0.75Effect of dilutive
stock options
    
    
    
    
    
    
    
    
    
    
    95,575
    
    
    
    (0.01
    )Diluted EPS
    
    $
    4,168
    
    
    $
    
    
    
    
    5,637,415
    
    
    $
    0.74
  COMMITMENTS AND CONTINGENCIES
  2009
    
    $
    1,3412010
    
    
    1,1592011
    
    
    6462012
    
    
    4932013
    
    
    210$
    3,849
  115




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15. TRADING ACCOUNT ASSETS
 Derivative Instruments Not Receiving Hedge Treatment
 Interest rate swaps
  Contract or
    
    Estimated
    
    Weighted AverageNotional
    
    Fair Value
    
    Interest Rate2007
    
    Amount
    
    Asset
    
    Liability
    
    Payable
    
    ReceivableTotal return swaps
 receive total
return
on CMBS
investment grade
total return
    
    $80,000
    
    $1,457
    
    
    
    Bank receives the spread on Lehman
Brothers AAA CMBS Index Plus a spread
and receives or pays the market value
change of index
   116




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LossRealized
    
    
    Unrealized
    
    
    fromGains
    
    
    Gains
    
    
    Trading2008
    
    (Losses)
    
    
    (Losses)
    
    
    AssetsInterest rate contracts:Swaps
    
    $
    (7,185
    )
    
    $
    (1,456
    )
    
    $
    (8,641
    )MBS and other trading assets
    
    
    (8
    )
    
    
    (50
    )
    
    
    (58
    )Total trading portfolio
    
    $
    (7,193
    )
    
    $
    (1,506
    )
    
    $
    (8,699
    )
 LossRealized
    
    
    Unrealized
    
    
    fromGains
    
    
    Gains
    
    
    Trading2007
    
    (Losses)
    
    
    (Losses)
    
    
    AssetsInterest rate contracts:Swaps
    
    $
    (4,263
    )
    
    $
    1,457
    
    
    $
    (2,806
    )MBS and other trading assets
    
    
    5
    
    
    
    3
    
    
    
    8Total trading portfolio
    
    $
    (4,258
    )
    
    $
    1,460
    
    
    $
    (2,798
    )
  2008
    
    Fair ValueMortgage-backed securities
    
    $
    169Mutual funds
    
    
    575Trading assets
    
    $
    744
 2007
    
    Fair ValueMortgage-backed securities and other
    
    $
    194Mutual funds
    
    
    656CMBS total return swaps
    
    
    1,457Trading assets
    
    $
    2,307
 16. DERIVATIVES HELD FOR ASSET AND LIABILITY MANAGEMENT
  117




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Contract or
    
    
    
    
    
    Weighted-AverageNotional
    
    Estimated
    
    Interest RateAmount
    
    Fair Value
    
    Receivable
    
    PayableDecember 31, 2008 -Interest rate swaps  pay fixed
receive 3-month LIBOR
    
    $
    168,000
    
    
    $
    (10,442
    )
    
    
    2.62
    %
    
    
    5.20
    %December 31, 2007 -Interest rate swaps  pay fixed
receive 3-month LIBOR
    
    $
    172,000
    
    
    $
    (4,979
    )
    
    
    5.02
    %
    
    
    5.17
    %
  Maturities
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    70,000
    
    
    $
    30,000
    
    
    $
    30,000
    
    
    $
    10,000
    
    
    $
    18,000
    
    
    $
    10,000Weighted-average
payable rate
    
    
    5.20
    %
    
    
    5.63
    %
    
    
    5.05
    %
    
    
    5.46
    %
    
    
    4.97
    %
    
    
    4.59
    %Weighted-average
receivable rate
    
    
    2.22
    %
    
    
    3.06
    %
    
    
    2.20
    %
    
    
    4.50
    %
    
    
    2.19
    %
    
    
    1.43
    %
   17. FAIR VALUES OF FINANCIAL INSTRUMENTS
  Level 1
 Level 2
 Level 3
 118




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Fair Value
Measurements
   Fair Value Measurements at December 31, 2008 UsingQuoted Prices in
    
    SignificantActive Markets
    
    Other
    
    Significantfor Identical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Trading securities
    
    $
    744
    
    
    $
    575
    
    
    $
    169
    
    
    
    Available for sale securities
    
    $
    273,678
    
    
    
    
    
    
    $
    121,609
    
    
    $
    152,069Liabilities:Interest rate swaps
    
    $
    10,442
    
    
    
    
    
    
    $
    10,442
    
    
    
    
 119




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Fair ValueMeasurementsUsing SignificantUnobservableInputsAvailable for salesecuritiesBeginning balance at January 1, 2008
    
    $
    Total gains or losses (realized / unrealized)
Recognized in earnings:Other-than-temporary impairment
    
    
    (11,824
    )Unrealized in other comprehensive income:Reclassification adjustment for losses
recognized in earnings
    
    
    11,824Transfers into Level 3
    
    
    111,575Level 3 fair value adjustment
    
    
    40,494Ending balance, December 31, 2008
    
    $
    152,069
   Fair Value Measurements at December 31, 2008 UsingQuoted Prices inActive Markets
    
    Significant
    
    Significantfor Identical
    
    Other
    
    UnobservableAssets
    
    Observable
    
    InputsTotal
    
    (Level 1)
    
    Inputs (Level 2)
    
    (Level 3)Assets:Impaired loans
    
    $
    31,508
    
    
    
    
    
    
    $
    31,508
    
    
    
    
  120




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##### Table of Contents



Disclosures about Fair Value of Financial Instruments
  2008
    
    2007Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    27,040
    
    
    $
    27,040
    
    
    $
    14,433
    
    
    $
    14,433Securities, held to maturity
    
    
    37
    
    
    
    38
    
    
    
    56
    
    
    
    58Loans receivable, net, including
impaired loans
    
    
    798,325
    
    
    
    834,633
    
    
    
    782,626
    
    
    
    788,513FHLB stock
    
    
    11,501
    
    
    
    n/a
    
    
    
    12,474
    
    
    
    n/aDue from broker
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Accrued interest receivable
    
    
    3,897
    
    
    
    3,897
    
    
    
    5,168
    
    
    
    5,168Liabilities:Demand deposits
    
    
    223,411
    
    
    
    223,411
    
    
    
    175,246
    
    
    
    175,246Certificates of deposit
    
    
    676,183
    
    
    
    680,331
    
    
    
    661,087
    
    
    
    661,767FHLB advances
    
    
    190,000
    
    
    
    191,538
    
    
    
    247,000
    
    
    
    248,616Securities sold under
repurchase agreements
    
    
    19,499
    
    
    
    19,997
    
    
    
    49,981
    
    
    
    49,648Subordinated debt
    
    
    25,774
    
    
    
    8,505
    
    
    
    25,774
    
    
    
    25,774Accrued interest payable
    
    
    1,158
    
    
    
    1,158
    
    
    
    821
    
    
    
    821
  Cash and Cash Equivalents
 Securities, held to maturity
 Loans
 FHLB Stock
 121




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Accrued Interest Receivable 
 Deposits
 FHLB Advances
 Securities Sold under Repurchase Agreements
 Subordinated Debt
 Due to/Due from Broker
 Accrued Interest Payable
 Commitments to Extend Credit, and Standby and Commercial Letters of Credit
 Accrued Interest Payable
 18. RELATED-PARTY TRANSACTIONS
   122




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2008
    
    
    2007Beginning Balance
    
    $
    4,850
    
    
    $
    4,825Additions
    
    
    1,052
    
    
    
    255Repayments
    
    
    (251
    )
    
    
    (141
    )Change in related party status
    
    
    270
    
    
    
    (89
    )Ending Balance
    
    $
    5,921
    
    
    $
    4,850
 19. EMPLOYEE BENEFIT PLAN
  123




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20. REAL ESTATE OWNED
   2008
    
    
    2007Real Estate OwnedBeginning of the year
    
    $
    
    
    
    $
    Additions
    
    
    12,656
    
    
    
    Capitalized improvements
    
    
    100
    
    
    
    Valuation allowance
    
    
    (4,408
    )
    
    
    Loan to facilitate sale of REO
    
    
    (750
    )
    
    
    Properties destroyed by fire
    
    
    (125
    )
    
    
    Other reductions
    
    
    (24
    )
    
    
    End of year
    
    $
    7,449
    
    
    $
    
 2008
    
    
    2007Real Estate Owned  Valuation AllowanceBeginning of the year
    
    $
    
    
    
    $
    Loss on write-down of real estate owned
    
    
    4,408
    
    
    
    Direct write-downs
    
    
    
    
    
    
    End of year
    
    $
    4,408
    
    
    $
    
 2008
    
    
    2007Real Estate Owned  Expenses on foreclosed assetsNet loss on disposition
    
    $
    34
    
    
    $
    Provision for unrealized losses
    
    
    4,408
    
    
    
    Operating expenses, net of rental income
    
    
    587
    
    
    
    End of year
    
    $
    5,029
    
    
    $
    
 124




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##### Table of Contents



21. PARENT COMPANY ONLY FINANCIAL INFORMATION
 Condensed Statements of Financial Condition
 December 31,(dollars in thousands)
    
    2008
    
    
    2007Assets:Cash and cash equivalents
    
    $
    105
    
    
    $
    2,364Trading account assets
    
    
    
    
    
    
    191Premises, equipment and other assets
    
    
    649
    
    
    
    362Investment in Bank
    
    
    70,427
    
    
    
    76,852Investment in capital trusts
    
    
    997
    
    
    
    950Income taxes receivable
    
    
    867
    
    
    
    Deferred tax asset
    
    
    267
    
    
    
    930Total assets
    
    $
    73,312
    
    
    $
    81,649Liabilities:Subordinated debt
    
    $
    25,774
    
    
    $
    25,774Accrued interest payable and other liabilities
    
    
    1,100
    
    
    
    833Total liabilities
    
    
    26,874
    
    
    
    26,607Commitments and contingenciesStockholders equityTotal shareholders equity
    
    
    46,438
    
    
    
    55,042Total liabilities and shareholders equity
    
    $
    73,312
    
    
    $
    81,649
 125




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##### Table of Contents



Condensed Statements of Earnings
 Year Ended December 31,(dollars in thousands)
    
    2008
    
    
    2007Interest income
    
    $
    18
    
    
    $
    6Interest expense
    
    
    (1,605
    )
    
    
    (2,090
    )Net interest expense
    
    
    (1,587
    )
    
    
    (2,084
    )Non-interest income:Gain/loss on sale of AFS
    
    
    
    
    
    
    Income (loss) from trading assets
    
    
    
    
    
    
    5Increase in cash surrender value of life insurance
    
    
    16
    
    
    
    Banking fee and other income
    
    
    
    
    
    
    58Other Income
    
    
    793
    
    
    
    Other income
    
    
    809
    
    
    
    63Other Expense
    
    
    (801
    )
    
    
    (901
    )Loss before income taxes and equity in undistributed
earnings of
subsidiary
    
    
    (1,579
    )
    
    
    (2,922
    )Income tax benefit
    
    
    574
    
    
    
    1,099Loss before equity in undistributed earnings of subsidiary
    
    
    (1,005
    )
    
    
    (1,823
    )Dividends from subsidiary
    
    
    1,250
    
    
    
    6,250Equity in (excess) undistributed earnings of subsidiary
    
    
    (11,055
    )
    
    
    (259
    )Net income
    
    
    (10,810
    )
    
    
    4,168Dividend on Preferred Stock
    
    
    61
    
    
    
    Income (loss) available to common shareholders
    
    $
    (10,871
    )
    
    $
    4,168
 126




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##### Table of Contents



Condensed Statements of Cash Flows
 Year EndedDecember 31,(dollars in thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (10,810
    )
    
    $
    4,168Adjustments to reconcile net income to net cash provided
by operating activities:Equity in excess earnings of subsidiary
    
    
    11,055
    
    
    
    259Activity in securities held for trading
    
    
    191
    
    
    
    (16
    )Depreciation and amortization
    
    
    22
    
    
    
    22(Decrease) increase in income taxes (payable) receivable
    
    
    69
    
    
    
    (696
    )Gain on sale of premises and equipment
    
    
    (793
    )
    
    
    Decrease (increase) in prepaid expenses and other assets
    
    
    (606
    )
    
    
    46Increase (decrease) in accounts payable, accrued expenses,
and other liabilities
    
    
    (62
    )
    
    
    39Net cash provided (used in) by operating activities
    
    
    (934
    )
    
    
    3,822Cash flows from investing activities:Proceeds from sale of premises and equipment
    
    
    1,088
    
    
    
    Cash contribution to subsidiary
    
    
    (12,700
    )
    
    
    Net cash provided by investing activities
    
    
    (11,612
    )
    
    
    Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    208
    
    
    
    595Proceeds
from common and preferred shares issued in private offerings
    
    
    11,220
    
    
    
    Cash dividends paid
    
    
    (1,141
    )
    
    
    (3,764
    )Net cash provided (used in) financing activities
    
    
    10,287
    
    
    
    (3,169
    )Net increase (decrease) in cash and cash equivalents
    
    
    (2,259
    )
    
    
    653Cash and cash equivalents at beginning of period
    
    
    2,364
    
    
    
    1,711Cash and cash equivalents at end of period
    
    $
    105
    
    
    $
    2,364
  127




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##### Table of Contents



22. SUBSEQUENT EVENTS (Unaudited)
   1.
    
    To submit a business plan that addresses the strategies and business tactics to meet
the required capital levels and improves the institutions profitability.2.
    
    To augment its loan concentration policy to address concentrations as a percentage of
unimpaired capital.3.
    
    To revise its liquidity policy to address long and short term liquidity needs and to
maintain adequate liquidity.4.
    
    To expand and revise its internal asset review policy so it is commensurate with the
institutions size, risk, and the complexity of its lending activities, and to engage a
third party review of the commercial lending activities and the adequacy of its allowance
for loan losses. LPB will incorporate the reasonable recommendations into its policy.
  5.
    
    HWFG and LPB will not declare, make, or pay any dividends or capital distributions
without obtaining the prior written non-objection of the OTS.6.
    
    HWFG will limit its growth in assets in any quarter to the interest credited on
deposits.7.
    
    HWFG will not incur, issue, renew, repurchase, or rollover any debt, increase any
current lines of credit, or guarantee the debt of any entity without receiving the prior
written non objection of the OTS. HWFG has no short term debt, only long term trust
preferred obligations.8.
    
    HWFG shall not make any golden parachute payment or indemnification payment unless they
comply with the requirements of regulation. HWFG will not enter into new compensation
arrangements without the prior written non-objection of the OTS. HWFG and LPB senior
officers have no employment agreements, although Concordia required them as a covenant of
its stock purchase agreement with HWFG, as an incentive to retain management.9.
    
    LPB and HWFG must notify the OTS at least 30 days before the employment of any senior
executive officer or new member of the Board(s) of Directors.10.
    
    LPB will not issue brokered deposits without the prior written approval of the Federal
Deposit Insurance Corporation (FDIC).11.
    
    LPB will purchase only agency backed and securities backed by the full faith and credit
of the U.S. government without the prior non-objection of the OTS.12.
    
    LPB shall not enter into third party contracts outside of the normal course of business
without the prior written non-objection of the OTS13.
    
    LPB shall not engage in any transaction with affiliates or subsidiaries (except exempt
transactions) without the prior written non-objection of the OTS.
  128




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##### Table of Contents



23. QUARTERLY FINANCIAL INFORMATION (Unaudited)
 Quarter Ended2008
    
    Dec. 31,
    
    
    Sep. 30,
    
    
    Jun. 30,
    
    
    Mar. 31,Interest income
    
    $
    16,495
    
    
    $
    17,583
    
    
    $
    18,457
    
    
    $
    19,565Interest expense
    
    
    8,706
    
    
    
    9,898
    
    
    
    11,195
    
    
    
    11,850Net interest income
    
    
    7,789
    
    
    
    7,685
    
    
    
    7,262
    
    
    
    7,715Provision for loan losses
    
    
    4,525
    
    
    
    1,565
    
    
    
    400
    
    
    
    500Net interest income after provision for loan losses
    
    
    3,264
    
    
    
    6,120
    
    
    
    6,862
    
    
    
    7,215Non-interest income
    
    
    (4,764
    )
    
    
    (4,937
    )
    
    
    (983
    )
    
    
    (6,304
    )Non-interest expense
    
    
    6,220
    
    
    
    6,269
    
    
    
    6,084
    
    
    
    6,110Loss before income taxes
    
    
    (7,720
    )
    
    
    (5,086
    )
    
    
    (205
    )
    
    
    (5,199
    )Income tax benefit
    
    
    (3,465
    )
    
    
    (1,908
    )
    
    
    (74
    )
    
    
    (1,953
    )Net loss
    
    $
    (4,255
    )
    
    $
    (3,178
    )
    
    $
    (131
    )
    
    $
    (3,246
    )Basic loss per share
    
    $
    (0.66
    )
    
    $
    (0.52
    )
    
    $
    (0.02
    )
    
    $
    (0.58
    )Diluted loss per share
    
    $
    (0.66
    )
    
    $
    (0.52
    )
    
    $
    (0.02
    )
    
    $
    (0.58
    )
 Quarter Ended2007
    
    Dec. 31,
    
    
    Sep. 30,
    
    
    Jun. 30,
    
    
    Mar. 31,Interest income
    
    $
    21,249
    
    
    $
    20,242
    
    
    $
    19,314
    
    
    $
    19,318Interest expense
    
    
    12,740
    
    
    
    12,200
    
    
    
    11,690
    
    
    
    11,639Net interest income
    
    
    8,509
    
    
    
    8,042
    
    
    
    7,624
    
    
    
    7,679Provision for loan losses
    
    
    250
    
    
    
    200
    
    
    
    100
    
    
    
    100Net interest income after provision for loan losses
    
    
    8,259
    
    
    
    7,842
    
    
    
    7,524
    
    
    
    7,579Non-interest income
    
    
    (1,545
    )
    
    
    (1,288
    )
    
    
    127
    
    
    
    1,076Non-interest expense
    
    
    5,734
    
    
    
    5,749
    
    
    
    5,747
    
    
    
    5,694Income before income taxes
    
    
    980
    
    
    
    805
    
    
    
    1,904
    
    
    
    2,961Provision for income taxes
    
    
    361
    
    
    
    307
    
    
    
    708
    
    
    
    1,106Net income
    
    $
    619
    
    
    $
    498
    
    
    $
    1,196
    
    
    $
    1,855Basic earnings per share
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.22
    
    
    $
    0.34Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.21
    
    
    $
    0.33
 129




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##### Table of Contents




    
    The fourth quarter of 2008 was negatively impacted by a $4.5 million provision for loan
loss, due primarily to one borrower in our Arizona market. The quarter was further
impacted by $3.8 million of OTTI.
    
    The third quarter of 2008 was impacted primarily by $5.6 million of OTTI.
    
    The first quarter of 2008 was impacted by a $8.7 loss on total rate of return trading
assets.  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A(T). Controls and Procedures
  Internal ControlIntegrated Framework
    
 Item 9B. Other Information
  130




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##### Table of Contents



PART III
 
 Item 10.
    
    Directors, Executive Officers and Corporate Governance
    
 Item 11. Executive Compensation.
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
    Number of securitiesremaining available for futureNumber of securities to be
    
    
    
    
    
    
    issuance under equityissued upon exercise of
    
    
    Weighted-average exercise
    
    
    compensation plans (excludingoutstanding options, warrants
    
    
    price of outstanding options,
    
    
    securities reflected in columnand rights
    
    
    warrants and rights
    
    
    (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans
approved by security
holders
    
    
    711,115
    
    
    $
    13.14
    
    
    
    310,509Total
    
    
    711,115
    
    
    $
    13.14
    
    
    
    310,509
 131




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountant Fees and Services
  132




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##### Table of Contents



Part IV
 
 Item 15. Exhibits and Financial Statement Schedules.
           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)10.2.1
    
    Fourth Amendment to Amended and
Restated Credit Agreement dated September 17, 2002. (1)
 133




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##### Table of Contents



EXHIBIT NO.
    
    DESCRIPTION10.2.2
    
    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)23.1
    
    Consent of Crowe Horwath 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. 134




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##### Table of Contents



SIGNATURES
  HARRINGTON WEST FINANCIAL GROUP, INC.March 30, 2009
    By:
    /s/ Craig J. CernyCraig J. CernyChairman of the Board
and Chief Executive Officer
(Principal Executive Officer)March 30, 2009
    By:
    /s/ William W. Phillips, jr.William W. Phillips, Jr.President, Chief Operating Officer
(Principal Executive Officer)March 30, 2009
    By:

/s/
Kerry SteeleKerry SteeleSr. Vice-President, Chief Financial Officer
(Principle Financial and Accounting Officer)  NAME
    
    TITLE
    
    DATE/s/ Craig J. Cerny
    
    Chairman of the Board and
    
    March 30, 2009Craig J. Cerny
    
    Chief Executive Officer/s/ William W. Phillips
    
    Director, President, and
    
    March 30, 2009William W. Phillips, Jr.
    
    Chief Operating Officer/s/ John J. Mcconnell
    
    Director
    
    March 30, 2009John J. McConnell/s/ Paul O. Halme
    
    Director
    
    March 30, 2009Paul O. Halme/s/ William D. Ross
    
    Director
    
    March 30, 2009William D. Ross/s/ Tim Hatlestad
    
    Director
    
    March 30, 2009Tim Hatlestad
 135