##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2006
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No.: 000-50066
 HARRINGTON WEST FINANCIAL GROUP, INC.
  Delaware
    
    48-1175170(State or other jurisdiction 
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
  o o þ
  o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. BusinessGeneral
    
    
    2Principal Products and ServicesLending Activities
    
    
    3Asset Quality
    
    
    10Investment Activities
    
    
    17Sources of Funds
    
    
    25Subsidiaries
    
    
    28Employees
    
    
    29Regulation of Harrington West Financial Group
    
    
    29Regulation of Los Padres Bank
    
    
    30Legislation
    
    
    34Regulation of Non-banking Affiliates
    
    
    36Item 1A. Risk Factors
    
    
    36Item 1B. Unresolved Staff Comments
    
    
    44Item 2. Properties
    
    
    44Item 3. Legal Proceedings
    
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    
    46PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    47Item 6. Selected Financial Data
    
    
    48Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsMission
    
    
    49Multiple Market Strategy
    
    
    49Product Line Diversification
    
    
    50Modern Financial Skills
    
    
    50Control Banking Risks
    
    
    51Performance Measurement
    
    
    51Profitability Drivers
    
    
    51Critical Accounting Policies
    
    
    53Results of Operation
    
    
    54Changes in Financial Condition
    
    
    60Asset and Liability Management
    
    
    62Liquidity and Capital Resources
    
    
    65Contractual Obligations and Commercial Commitments
    
    
    67Off Balance Sheet Arrangements
    
    
    68Inflation and Changing Prices
    
    
    69Effect of Newly, But Not Yet Effective Accounting Standards
    
    
    69Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    69Item 8. Financial Statements and Supplementary Data
    
    
    69Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    118Item 9A. Controls and Procedures
    
    
    118Item 9B. Other Information
    
    
    118PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    118Item 11. Executive Compensation
    
    
    118Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    119Item 13. Certain Relationships, Related Transactions and Director Independence
    
    
    119Item 14. Principal Accounting Fees and Services
    
    
    119PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    120SIGNATURES
    
    
    122CERTIFICATIONS
    
    
    123EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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




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




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Lending Activities
 General
 3




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December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real estate loans:Single-family
    
    $
    106,675
    
    
    
    13.9
    %
    
    $
    115,925
    
    
    
    17.0
    %
    
    $
    100,485
    
    
    
    16.6
    %
    
    $
    93,725
    
    
    
    17.9
    %
    
    $
    116,714
    
    
    
    25.8
    %Multi-family
    
    
    79,896
    
    
    
    10.4
    
    
    
    80,855
    
    
    
    11.9
    
    
    
    84,937
    
    
    
    14.0
    
    
    
    82,090
    
    
    
    15.7
    
    
    
    71,856
    
    
    
    15.9Commercial
    
    
    264,915
    
    
    
    34.6
    
    
    
    253,208
    
    
    
    37.2
    
    
    
    260,759
    
    
    
    43.1
    
    
    
    234,606
    
    
    
    44.8
    
    
    
    183,264
    
    
    
    40.5Construction (1)
    
    
    112,645
    
    
    
    14.7
    
    
    
    70,883
    
    
    
    10.4
    
    
    
    34,981
    
    
    
    5.8
    
    
    
    30,835
    
    
    
    5.9
    
    
    
    19,666
    
    
    
    4.4Land acquisition and development
    
    
    54,738
    
    
    
    7.1
    
    
    
    36,085
    
    
    
    5.3
    
    
    
    27,460
    
    
    
    4.5
    
    
    
    8,312
    
    
    
    1.6
    
    
    
    14,948
    
    
    
    3.3Commercial and industrial loans
    
    
    119,074
    
    
    
    15.6
    
    
    
    96,566
    
    
    
    14.2
    
    
    
    72,240
    
    
    
    11.9
    
    
    
    56,942
    
    
    
    10.8
    
    
    
    27,676
    
    
    
    6.1Consumer loans
    
    
    25,304
    
    
    
    3.3
    
    
    
    26,653
    
    
    
    3.9
    
    
    
    23,757
    
    
    
    3.9
    
    
    
    16,613
    
    
    
    3.1
    
    
    
    17,565
    
    
    
    3.9Other loans (2)
    
    
    2,206
    
    
    
    0.4
    
    
    
    1,271
    
    
    
    0.1
    
    
    
    1,044
    
    
    
    0.2
    
    
    
    1,035
    
    
    
    0.2
    
    
    
    503
    
    
    
    0.1Total loans receivable
    
    
    765,453
    
    
    
    100.0
    %
    
    
    681,446
    
    
    
    100.0
    %
    
    
    605,663
    
    
    
    100.0
    %
    
    
    524,158
    
    
    
    100.0
    %
    
    
    452,192
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    (5,914
    )
    
    
    
    
    
    
    (5,661
    )
    
    
    
    
    
    
    (5,228
    )
    
    
    
    
    
    
    (4,587
    )
    
    
    
    
    
    
    (3,797
    )Net deferred loan fees
    
    
    (2,103
    )
    
    
    
    
    
    
    (2,498
    )
    
    
    
    
    
    
    (1,730
    )
    
    
    
    
    
    
    (1,394
    )
    
    
    
    
    
    
    (1,332
    )Net (discounts) premiums
    
    
    (403
    )
    
    
    
    
    
    
    (397
    )
    
    
    
    
    
    
    (263
    )
    
    
    
    
    
    
    319
    
    
    
    
    
    
    
    987(8,420
    )
    
    
    
    
    
    
    (8,556
    )
    
    
    
    
    
    
    (7,221
    )
    
    
    
    
    
    
    (5,662
    )
    
    
    
    
    
    
    (4,142
    )Loans receivable, net
    
    $
    757,033
    
    
    
    
    
    
    $
    672,890
    
    
    
    
    
    
    $
    598,442
    
    
    
    
    
    
    $
    518,496
    
    
    
    
    
    
    $
    448,050
 
 (1)
    
    Includes loans secured by residential and commercial properties. At December 31, 2006,
we had $57.7 million of construction loans secured by residential properties,$25.5 million of
land and development (loans for the initial acquisition of land and off-site improvements) and
$29.4 million of construction loans secured by commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans. 4




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Due 1-5
    
    
    Due 5 or moreyears after
    
    
    years afterDue 1 year
    
    
    December 31,
    
    
    December 31,or less
    
    
    2006
    
    
    2006
    
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    22
    
    
    $
    4,021
    
    
    $
    102,632
    
    
    $
    106,675Multi-family residential
    
    
    6,231
    
    
    
    11,795
    
    
    
    61,870
    
    
    
    79,896Commercial
    
    
    26,884
    
    
    
    106,194
    
    
    
    131,837
    
    
    
    264,915Construction (1)
    
    
    62,924
    
    
    
    15,359
    
    
    
    34,362
    
    
    
    112,645Land acquisition and development
    
    
    31,606
    
    
    
    19,422
    
    
    
    3,710
    
    
    
    54,738Commercial and industrial loans
    
    
    69,232
    
    
    
    40,992
    
    
    
    8,850
    
    
    
    119,074Consumer loans
    
    
    10
    
    
    
    856
    
    
    
    24,438
    
    
    
    25,304Other loans (2)
    
    
    1,856
    
    
    
    350
    
    
    
    
    
    
    
    2,206Total
    
    $
    198,765
    
    
    $
    198,989
    
    
    $
    367,699
    
    
    $
    765,453
 
 (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans.  5




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Floating oradjustable-Fixed rate
    
    
    rate
    
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    73,571
    
    
    $
    33,082
    
    
    $
    106,653Multi-family residential
    
    
    46,091
    
    
    
    27,574
    
    
    
    73,665Commercial
    
    
    144,869
    
    
    
    93,162
    
    
    
    238,031Construction (1)
    
    
    22,379
    
    
    
    27,342
    
    
    
    49,721Land acquisition and development
    
    
    1,503
    
    
    
    21,629
    
    
    
    23,132Commercial and industrial loans
    
    
    25,883
    
    
    
    23,959
    
    
    
    49,842Consumer loans
    
    
    616
    
    
    
    24,678
    
    
    
    25,294Other loans (2)
    
    
    
    
    
    
    350
    
    
    
    350Total
    
    $
    314,912
    
    
    $
    251,776
    
    
    $
    566,688
 
 (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer lines of credit loans. Origination, Purchase and Sale of Loans.
   6




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




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Construction Loans.
   Land acquisition and development.
 8




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Commercial and Industrial Loans
  Consumer and Other Loans
     9




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Asset Quality
 General
 Loan Delinquencies
 Non-Performing Assets
 10




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At December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Non-accruing loans:Single-family residential
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    218Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Land acquisition and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    98
    
    
    
    
    
    
    
    95
    
    
    
    8
    
    
    
    Consumer and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    Total non-accruing loans
    
    
    98
    
    
    
    
    
    
    
    95
    
    
    
    12
    
    
    
    218Total non-performing loans
    
    
    98
    
    
    
    
    
    
    
    95
    
    
    
    12
    
    
    
    218Troubled debt restructurings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate owned, net of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets and
troubled debt restructurings
    
    $
    98
    
    
    $
    
    
    
    $
    95
    
    
    $
    12
    
    
    $
    218Total non-performing loans
and troubled debt
restructurings as a
percentage of total loans
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.02
    %
    
    
    0.00
    %
    
    
    0.05
    %Total non-performing assets
and troubled debt
restructurings as a
percentage of total assets
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %
   Classified Assets
 11




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Allowance for Loan Losses.
 Allocated allowance for specifically identified problem loans Accounting by Creditors for
Impairment of a Loan as amended by SFAS No. 118.
 Formula allowance for non-homogenous loans
  Formula allowance for large groups of smaller balance homogenous loans
 Unallocated Allowance
 12




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




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At December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Specific reserve
    
    $
    16
    
    
    $
    441
    
    
    $
    Formula-non homogeneous
    
    
    5,296
    
    
    
    4,611
    
    
    
    4,477Formula-homogeneous
    
    
    560
    
    
    
    605
    
    
    
    570Unallocated
    
    
    42
    
    
    
    4
    
    
    
    181$
    5,914
    
    
    $
    5,661
    
    
    $
    5,228
    14




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At and For the Year EndedDecember 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Balance at beginning of period
    
    $
    5,661
    
    
    $
    5,228
    
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736Charge-offs:Real estate loansCommercial
    
    
    (352
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (330
    )Consumer and other loans
    
    
    (4
    )
    
    
    (2
    )
    
    
    (9
    )
    
    
    
    
    
    
    Total charge-offs
    
    
    (356
    )
    
    
    (2
    )
    
    
    (9
    )
    
    
    
    
    
    
    (330
    )Recoveries
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    (312
    )
    
    
    (2
    )
    
    
    (9
    )
    
    
    
    
    
    
    (330
    )Provision for losses on loans
    
    
    565
    
    
    
    435
    
    
    
    650
    
    
    
    790
    
    
    
    391Balance at end of period
    
    $
    5,914
    
    
    $
    5,661
    
    
    $
    5,228
    
    
    $
    4,587
    
    
    $
    3,797Allowance for loan losses as a percent of
total net loans outstanding at the end of
the period
    
    
    0.78
    %
    
    
    0.84
    %
    
    
    0.87
    %
    
    
    0.88
    %
    
    
    0.83
    %Ratio of net charge-offs to average loans
outstanding during the period
    
    
    0.01
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    0.07
    %
 15




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December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachCategory to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in Thousands)Real estate loans:Single-family residential
    
    $
    231
    
    
    
    13.9
    %
    
    $
    265
    
    
    
    17.0
    %
    
    $
    265
    
    
    
    16.6
    %
    
    $
    308
    
    
    
    17.9
    %
    
    $
    390
    
    
    
    25.8
    %Multi-family residential
    
    
    417
    
    
    
    10.4
    
    
    
    422
    
    
    
    11.9
    
    
    
    554
    
    
    
    14.0
    
    
    
    416
    
    
    
    15.7
    
    
    
    344
    
    
    
    15.9Commercial
    
    
    1,054
    
    
    
    34.6
    
    
    
    1,115
    
    
    
    37.2
    
    
    
    1,072
    
    
    
    43.1
    
    
    
    1,400
    
    
    
    44.8
    
    
    
    773
    
    
    
    40.5Construction
    
    
    452
    
    
    
    14.7
    
    
    
    300
    
    
    
    10.4
    
    
    
    564
    
    
    
    5.8
    
    
    
    419
    
    
    
    5.9
    
    
    
    546
    
    
    
    4.4Land acquisition and development
    
    
    520
    
    
    
    7.1
    
    
    
    272
    
    
    
    5.3
    
    
    
    211
    
    
    
    4.5
    
    
    
    123
    
    
    
    1.6
    
    
    
    215
    
    
    
    3.3Commercial and industrial loans
    
    
    2,868
    
    
    
    15.6
    
    
    
    2,944
    
    
    
    14.2
    
    
    
    2,076
    
    
    
    11.9
    
    
    
    1,616
    
    
    
    10.8
    
    
    
    1,253
    
    
    
    6.1Consumer and other loans
    
    
    329
    
    
    
    3.7
    
    
    
    340
    
    
    
    3.9
    
    
    
    305
    
    
    
    4.1
    
    
    
    216
    
    
    
    3.3
    
    
    
    149
    
    
    
    4.0Unallocated reserve
    
    
    43
    
    
    
    
    
    
    
    3
    
    
    
    .1
    
    
    
    181
    
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    127
    
    
    
    Total
    
    $
    5,914
    
    
    
    100
    %
    
    $
    5,661
    
    
    
    100
    %
    
    $
    5,228
    
    
    
    100
    %
    
    $
    4,587
    
    
    
    100
    %
    
    $
    3,797
    
    
    
    100
    %
 16




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##### Table of Contents



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




---



##### Table of Contents



i.e
    18




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##### Table of Contents



Corporate Debt Securities.
 Trading Account Assets and Other Securities
  19




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##### Table of Contents



20




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in thousands)Mortgage-backed securities
pass throughsDue from one to five years
    
    $
    1,039
    
    
    $
    1,011
    
    
    
    4.57
    %
    
    $
    1,674
    
    
    $
    1,634
    
    
    
    5.39
    %
    
    $
    1,453
    
    
    $
    1,463
    
    
    
    5.71
    %Due from five to ten years
    
    
    12,347
    
    
    
    12,187
    
    
    
    4.81
    
    
    
    3,617
    
    
    
    3,638
    
    
    
    5.89
    
    
    
    1,995
    
    
    
    2,013
    
    
    
    5.35Due over ten years
    
    
    84,858
    
    
    
    83,747
    
    
    
    4.62
    
    
    
    119,862
    
    
    
    117,568
    
    
    
    4.15
    
    
    
    110,917
    
    
    
    110,226
    
    
    
    3.65Total mortgage backed
securities -
pass-throughs (1)
    
    
    98,244
    
    
    
    96,945
    
    
    
    4.64
    
    
    
    125,153
    
    
    
    122,840
    
    
    
    4.22
    
    
    
    114,365
    
    
    
    113,702
    
    
    
    3.70Collateralized mortgage
obligationsDue over ten years
    
    
    76,182
    
    
    
    75,795
    
    
    
    5.31
    
    
    
    80,470
    
    
    
    79,531
    
    
    
    4.21
    
    
    
    73,894
    
    
    
    73,399
    
    
    
    3.31Total collateralized
mortgage obligations
    
    
    76,182
    
    
    
    75,795
    
    
    
    5.31
    
    
    
    80,470
    
    
    
    79,531
    
    
    
    4.21
    
    
    
    73,894
    
    
    
    73,399
    
    
    
    3.31Commercial mortgage-backed
securitiesDue from one to five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,269
    
    
    
    18,597
    
    
    
    5.81Due over ten years
    
    
    31,312
    
    
    
    31,081
    
    
    
    4.13
    
    
    
    40,647
    
    
    
    40,179
    
    
    
    3.63
    
    
    
    29,276
    
    
    
    29,324
    
    
    
    3.63Total commercial
mortgage-back securities
    
    
    31,312
    
    
    
    31,081
    
    
    
    4.13
    
    
    
    40,647
    
    
    
    40,179
    
    
    
    3.63
    
    
    
    47,545
    
    
    
    47,921
    
    
    
    4.47Asset-backed securities
(underlying
securities mortgages)Due over ten years
    
    
    102,815
    
    
    
    103,159
    
    
    
    5.65
    
    
    
    141,086
    
    
    
    141,564
    
    
    
    5.40
    
    
    
    187,949
    
    
    
    189,389
    
    
    
    3.63Total asset backed-securities
    
    
    102,815
    
    
    
    103,159
    
    
    
    5.65
    
    
    
    141,086
    
    
    
    141,564
    
    
    
    5.40
    
    
    
    187,949
    
    
    
    189,389
    
    
    
    3.63Asset-backed securitiesDue from one to five years
    
    
    1,447
    
    
    
    1,459
    
    
    
    11.15
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due over ten years
    
    
    1,300
    
    
    
    1,290
    
    
    
    5.63
    
    
    
    3,335
    
    
    
    3,238
    
    
    
    7.17
    
    
    
    5,460
    
    
    
    5,143
    
    
    
    5.13Total asset backed securities
    
    
    2,747
    
    
    
    2,749
    
    
    
    8.54
    
    
    
    3,335
    
    
    
    3,238
    
    
    
    7.17
    
    
    
    5,460
    
    
    
    5,143
    
    
    
    5.13Corporate debt securitiesDue over ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    1,652
    
    
    
    15.88Total corporate debt
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    1,652
    
    
    
    15.88Total
    
    $
    311,300
    
    
    $
    309,729
    
    
    
    5.13
    
    
    $
    390,691
    
    
    $
    387,352
    
    
    
    4.61
    
    
    $
    430,782
    
    
    $
    431,206
    
    
    
    4.18
 
 (1)
    
    The fair value at December 31, 2006, consisted of $23.5 million of Fannie Mae
participation certificates, $14.4 million of Freddie Mac participation certificates and $59.0
million of Ginnie Mae participation certificates. At December 31, 2005, the portfolio
consisted of $34.0 million of Fannie Mae participation certificates, $18.6 million of Freddie
Mac participation certificates and $70.2 million of Ginnie Mae participation certificates. At
December 31, 2004, the portfolio consisted of $16.6 million of Fannie Mae participation
certificates, $22.5 million of Freddie Mac participation certificates and $74.6 million of
Ginnie Mae participation certificates. 21




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##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities:Due from five to ten years
    
    $
    66
    
    
    $
    68
    
    
    
    6.81
    %
    
    $
    77
    
    
    $
    80
    
    
    
    7.55
    %
    
    $
    90
    
    
    $
    96
    
    
    
    7.56
    %Due over ten years
    
    
    3
    
    
    
    3
    
    
    
    7.28
    
    
    
    3
    
    
    
    4
    
    
    
    7.48
    
    
    
    3
    
    
    
    3
    
    
    
    7.48Total mortgage-backed
securities (1)
    
    
    69
    
    
    
    71
    
    
    
    6.83
    
    
    
    80
    
    
    
    84
    
    
    
    7.54
    
    
    
    93
    
    
    
    99
    
    
    
    7.55Total securities classified as held
to maturity
    
    $
    69
    
    
    
    71
    
    
    
    6.83
    %
    
    $
    80
    
    
    $
    84
    
    
    
    7.54
    %
    
    $
    93
    
    
    $
    99
    
    
    
    7.55
    %
 
 (1)
    
    Consists entirely of Fannie Mae participation certificates. 22




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##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities
    
    $
    235
    
    
    $
    237
    
    
    
    5.18
    %
    
    $
    324
    
    
    $
    323
    
    
    
    4.32
    %
    
    $
    383
    
    
    $
    388
    
    
    
    3.91
    %Mutual funds
    
    
    585
    
    
    
    600
    
    
    
    
    
    
    
    522
    
    
    
    524
    
    
    
    
    
    
    
    560
    
    
    
    581
    
    
    
    Other securities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    Total trading account assets
    
    $
    820
    
    
    $
    837
    
    
    
    1.49
    %
    
    $
    846
    
    
    $
    975
    
    
    
    1.65
    
    
    $
    943
    
    
    $
    1,046
    
    
    
    1.59
 
 (1)
    
    The balance at December 31, 2006, 2005 and 2004 consisted of total return swaps, which
we use to enhance our returns, and interest rate contracts, which do not qualify for hedge
accounting treatment pursuant to SFAS No. 133 . 23




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##### Table of Contents



At or For the YearsEnded December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Beginning balance
    
    $
    387,436
    
    
    $
    431,305
    
    
    $
    398,931Mortgage-backed securities pass-throughs purchased-
available for sale
    
    
    10,712
    
    
    
    48,663
    
    
    
    43,238Collateralized mortgage obligations purchased-
available for sale
    
    
    32,819
    
    
    
    27,180
    
    
    
    47,165Commercial mortgage-backed securities purchased-
available for sale
    
    
    
    
    
    
    
    
    
    
    62Asset-backed securities purchased- available for sale
    
    
    20,344
    
    
    
    31,838
    
    
    
    64,064Corporate debt securities purchased- available for sale
    
    
    
    
    
    
    
    
    
    
    Total securities purchased
    
    
    63,875
    
    
    
    107,681
    
    
    
    154,529Less:Sale and principal payments of mortgage-backed securities,
pass throughs  available for sale
    
    
    (36,610
    )
    
    
    (36,694
    )
    
    
    (56,943
    )Sale and principal payments of collateralized mortgage
obligations  available for sale
    
    
    (37,076
    )
    
    
    (20,523
    )
    
    
    (22,073
    )Sale and principal payments of commercial
mortgage-backed securities  available for sale
    
    
    (8,376
    )
    
    
    (5,619
    )
    
    
    (10,982
    )Sale and principal payments of asset-backed securities
 available for sale
    
    
    (59,139
    )
    
    
    (81,651
    )
    
    
    (29,797
    )Principal payments of mortgage-backed securities, pass
throughs  held to maturity
    
    
    (13
    )
    
    
    (13
    )
    
    
    (129
    )Sale and principal payments of corporate bonds,
available for sale
    
    
    
    
    
    
    (1,778
    )
    
    
    Total securities sold
    
    
    (141,214
    )
    
    
    (146,278
    )
    
    
    (119,924
    )Change in net unrealized gain (loss) on
securities available for sale and held to maturity
    
    
    1,766
    
    
    
    (2,832
    )
    
    
    353Amortization of (premium)/discount
    
    
    (2,063
    )
    
    
    (2,440
    )
    
    
    (2,584
    )Ending balance
    
    $
    309,800
    
    
    $
    387,436
    
    
    $
    431,305
 24




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##### Table of Contents



Sources of Funds
 General
 Deposits
   Amount(In Thousands)Certificates of deposit maturing:Three months or less
    
    $
    120,591Over three through six months
    
    
    82,961Over six through twelve months
    
    
    96,264Over twelve months
    
    
    8,836Total
    
    $
    308,652
 25




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##### Table of Contents



At December 31,2006
    
    
    2005
    
    
    2004(In Thousands)0.00% to 2.99%
    
    $
    2,763
    
    
    $
    65,041
    
    
    $
    366,6853.00% to 3.99%
    
    
    24,339
    
    
    
    301,287
    
    
    
    18,3894.00% to 4.99%
    
    
    192,937
    
    
    
    109,300
    
    
    
    29,9835.00% to 5.99%
    
    
    336,245
    
    
    
    6,584
    
    
    
    6,9406.00% to 6.99%
    
    
    
    
    
    
    
    
    
    
    1,1587.00% and higher
    
    
    
    
    
    
    
    
    
    
    887Total
    
    $
    556,284
    
    
    $
    482,212
    
    
    $
    424,042
  Over SixMonths
    
    
    Over One
    
    
    Over TwoSix Months
    
    
    Through One
    
    
    Year Through
    
    
    Years Through
    
    
    Over Threeand Less
    
    
    Year
    
    
    Two Years
    
    
    Three Years
    
    
    Years
    
    
    Total(In Thousands)0.00% to 2.99%
    
    $
    2,331
    
    
    $
    203
    
    
    $
    229
    
    
    $
    
    
    
    $
    
    
    
    $
    2,7633.00% to 3.99%
    
    
    12,741
    
    
    
    3,789
    
    
    
    5,096
    
    
    
    2,457
    
    
    
    255
    
    
    
    24,3384.00% to 4.99%
    
    
    169,718
    
    
    
    12,459
    
    
    
    3,033
    
    
    
    3,847
    
    
    
    3,881
    
    
    
    192,9385.00% to 5.99%
    
    
    188,287
    
    
    
    146,071
    
    
    
    551
    
    
    
    752
    
    
    
    584
    
    
    
    336,2456.00% to 6.99%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.00% and higher
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    373,077
    
    
    $
    162,522
    
    
    $
    8,909
    
    
    $
    7,056
    
    
    $
    4,720
    
    
    $
    556,284
 Borrowings.
  26




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27




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##### Table of Contents



At or For the Year EndedDecember 31,2006
    
    2005
    
    2004(Dollars in Thousands)Securities sold under agreements to repurchase:Average balance outstanding
    
    $
    1,212
    
    
    $
    10,853
    
    
    $
    20,749Maximum amount outstanding at any month-end
during the period
    
    
    6,141
    
    
    
    22,298
    
    
    
    21,245Balance outstanding at end of period
    
    
    6,141
    
    
    
    13
    
    
    
    20,689Average interest rate during the period
    
    
    2.67
    %
    
    
    1.49
    %
    
    
    1.47
    %Average interest rate at end of period
    
    
    4.11
    %
    
    
    1.05
    %
    
    
    1.48
    %Short-term FHLB advances:Average balance outstanding
    
    $
    267,452
    
    
    $
    295,116
    
    
    $
    263,898Maximum amount outstanding at any month-end
during the period
    
    
    310,000
    
    
    
    339,050
    
    
    
    298,000Balance outstanding at end of period
    
    
    238,000
    
    
    
    300,000
    
    
    
    297,000Average interest rate during the period
    
    
    5.05
    %
    
    
    3.26
    %
    
    
    1.46
    %Average interest rate at end of period
    
    
    5.29
    %
    
    
    4.03
    %
    
    
    2.22
    %
 
 Subsidiaries
      28




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##### Table of Contents



Employees
  
 Regulation of Harrington West Financial Group, Inc.
 General
 Activities Restriction Test
 Restrictions on Acquisitions
  29




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##### Table of Contents



Regulation of Los Padres Bank
 General
   Insurance of Deposit Accounts
   Regulatory Capital Requirements and Prompt Corrective Action
  30




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##### Table of Contents




    
    tangible capital equal to at least 1.5% of total adjusted assets,
    
    leverage capital (core capital) equal to 4% of total adjusted assets, and
    
    risk-based capital equal to 8% of total risk-weighted assets.
  31




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##### Table of Contents



Tangible Capital(1)
    
    
    Tier 1 Leverage Capital(1)
    
    
    Risk-Based Capital(1)Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Actual regulatory capital
    
    $
    85,008
    
    
    
    7.41
    %
    
    $
    85,008
    
    
    
    7.41
    %
    
    $
    90,921
    
    
    
    10.78
    %Minimum regulatory capital
    
    
    17,198
    
    
    
    1.50
    
    
    
    45,862
    
    
    
    4.00
    
    
    
    67,481
    
    
    
    8.00Excess regulatory capital
    
    $
    67,810
    
    
    
    5.91
    %
    
    $
    39,146
    
    
    
    3.41
    %
    
    $
    23,440
    
    
    
    2.78
    %
 
 (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
$85.0 million as of December 31, 2006.  Loans-to-One Borrower Limitations
 
    
    the savings association is in compliance with its capital requirements;
    
    the loans comply with applicable loan-to-value requirements; and
    
    the aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus.
  Qualified Thrift Lender Test
 32




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##### Table of Contents



Affiliate Transactions
 Capital Distribution Limitations
 
    
    be required to file an application and await approval from the OTS before it makes a
capital distribution;
    
    be required to file a notice 30 days before the capital distribution; or
    
    be permitted to make the capital distribution without notice or application to the OTS.
  
    
    it is not eligible for expedited treatment of its other applications under OTS regulations;
    
    the total amount of all of capital distributions, including the proposed capital
distribution, for the applicable calendar year exceeds its net income for that year to
date plus retained net income for the preceding two years;
    
    it would not be at least adequately capitalized, under the prompt corrective action
regulations of the OTS following the distribution; or
    
    the associations proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement between the savings
association and the OTS, or the FDIC, or violate a condition imposed on the savings
association in an OTS-approved application or notice.
  
    
    would not be well capitalized under the prompt corrective action regulations of the
OTS following the distribution;
    
    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.
  33




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##### Table of Contents



Community Reinvestment Act and the Fair Lending Laws
 Federal Home Loan Bank System
 
    
    1% of its aggregate outstanding principal amount of its residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each calendar year;
or
    
    5% of its FHLB advances or borrowings.
  Federal Reserve System
 Activities of Subsidiaries
 
 Legislation
 USA Patriot Act of 2001.
 34




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##### Table of Contents



Financial Services Modernization Legislation.
     Sarbanes-Oxley Act
  35




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##### Table of Contents



Regulation of Non-banking Affiliates
  
 Item 1A. Risk Factors
   Our business is subject to various lending risks which could adversely impact our results of
operations and financial condition.
 Our commercial real estate and multi-family residential loans involve higher principal amounts
than other loans, and repayment of these loans may be dependent on factors outside our control or
the control of our borrowers.
 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.
 36




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##### Table of Contents



Our construction loans are based upon estimates of costs and value associated with the
complete project. These estimates may be inaccurate.
 Our consumer loans generally have a higher risk of default than our other loans
 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;
    
    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.
   37




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##### Table of Contents



Our business is subject to economic and other general risks which may adversely impact our results
of operations and financial condition.
 Changes in economic conditions, in particular an economic slowdown in the markets in which we
operate, could hurt our business.
 
    
    loan delinquencies may increase;
    
    problem assets and foreclosures may increase;
    
    demand for our products and services may decline;
    
    low cost or noninterest-bearing deposits may decrease; and
    
    collateral, for loans made by us, especially real estate, may decline in value, in
turn reducing customers borrowing power.
 A downturn in the real estate market may adversely affect our business.
 We are exposed to risk of environmental liabilities with respect to properties to which we
take title.
 We may suffer losses in our loan portfolio despite our underwriting practices.
 38




---



##### Table of Contents



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.
  Our investment portfolio includes securities and total rate of return swaps which are sensitive to
interest rates and spread changes and which we may be required to sell at a loss to meet our
liquidity needs.
  39




---



##### 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 continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
  40




---



##### Table of Contents



Our plan to expand the franchise with additional banking offices in California, Kansas and Arizona
may not be successful, which would negatively affect our growth strategy and prospects, and
profitability.
  We are dependent on key individuals and our ability to attract and retain banking professionals
with significant experience in our local markets.
   We rely on the investment advice and research of an independent advisor, and the loss of services
from that advisor could disrupt our business.
  41




---



##### Table of Contents



We face strong competition from other financial institutions, financial service companies and other
companies that offer banking services which can hurt our business.
   We continually encounter technological change, and we may have fewer resources than many of our
competitors to continue to invest in technological improvements.
  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.
  42




---



##### Table of Contents



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.
    43




---



##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
 Office Locations
  Leased/Owned
    
    Date Office
    
    Total Deposits atand
    
    Opened or Purchase
    
    December 31, 2006Office Location
    
    Lease Expiration Date
    
    Date
    
    (Dollars in thousands)Solvang Branch and Administrative
Offices 
610 Alamo Pintado Road
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one
option for five
years
    
    June 1983
    
    $
    117,243Loan Center
1992 Old Mission Drive
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one
option for five
years
    
    March 1998
    
    
    Pismo Branch
831 Oak Park Boulevard
Pismo Beach, CA 93449
    
    Lease expires on
2/9/08 with two
options for five
years each
    
    May 1988
    
    
    82,150Atascadero Branch
7315 El Camino Real
Atascadero, CA 93422
    
    Lease expires on
4/30/11 with three
options for five
years each
    
    May 1991
    
    
    51,981Santa Maria Branch
402 E. Main Street
Santa Maria, CA 93454
    
    Lease expires on
6/30/07 with three
options for five
years each
    
    July 1992
    
    
    66,438Buellton Branch
234 E. Highway 246, Suite 109
Buellton, CA 93427
    
    Lease expires on
11/2/07 with one
option for five
years
    
    December 1997
    
    
    20,476Goleta Branch
197 North Fairview
Goleta, CA 93117
    
    Lease expires on
10/31/08 with three
options for five
years each
    
    February 1999
    
    
    81,399San Luis Branch
1322 Madonna Road
San Luis Obispo, CA 93405
    
    Lease expires on
12/31/10 with one
option for five
years
    
    January 2001
    
    
    24,643Nipomo Branch
542 W. Teft Road
Nipomo, CA 93444
    
    Lease expires on
12/31/10 with two
options for five
years each
    
    July 2001
    
    
    24,923Storage Area
1120 Mission Drive
Solvang, CA 93463
    
    Month-to-month Lease
with no expiration
date
    
    June 1992
    
    
    
 44




---



##### Table of Contents



Leased/Owned
    
    Date Office
    
    Total Deposits atand
    
    Opened or Purchase
    
    December 31, 2006Office Location
    
    Lease Expiration Date
    
    Date
    
    (Dollars in thousands)Human Resources, Compliance &
Training Room
Suite A-4 and A-5
1984 Old Mission Drive
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one
option for five
years.
    
    March 2000
    
    
    Loan Origination Center
Suite B-12
1988 Old Mission Drive
Solvang, CA 93463
    
    Lease expires on
1/31/10 with one
option for five
years
    
    April 2002
    
    
    Harrington Bank
6300 Nall Avenue
Shawnee Mission, KS 66208
    
    Lease expires on
12/31/10 with four
options for five
years each
    
    November 2001
    
    
    67,862Harrington Wealth Management
Company 
10150 Lantern Road, Suite 150
Fishers, IN 46038
    
    Lease expires on
10/31/11
    
    November 2001
    
    
    Arizona  Scottsdale Branch
10555 North 114th Street, Suite 100
Scottsdale, AZ 85295
    
    Lease expires on
9/30/12 with two
options for five
years each
    
    November 2002
    
    
    37,700Ventura Branch
1171 S. Victoria Ave., Suite A
Ventura, CA 93003
    
    Lease expires on
6/30/08 with four
options for five
years each
    
    May 2004
    
    
    34,664Thousand Oaks Branch
2920 Thousand Oaks Blvd, Suite A
Thousand Oaks, CA 91360
    
    Lease expires on
5/31/10 with three
options for five
years each.
    
    June 1, 2005
    
    
    33,935Arizona  Northsight Branch
14100 N. Northsight Blvd.
Scottsdale, AZ 85260
    
    Owned
    
    December 17, 2004
    
    
    21,188
 45




---



##### Table of Contents



Leased/Owned
    
    Date Office
    
    Total Deposits atand
    
    Opened or Purchase
    
    December 31, 2005Office Location
    
    Lease Expiration Date
    
    Date
    
    (Dollars in thousands)Ojai Branch
110 South Ventura Street
Ojai, CA 93023
    
    Owned
    
    November 1997
    
    
    45,974Hanalei Bay Condo
5380 Honiki Road
Princeville, Kauai
    
    Owned
    
    July 1994
    
    
    Metcalf Branch
14300 Metcalf
Overland Park, KS 66223
    
    Owned
    
    December 2003
    
    
    17,654Olathe Branch
College & Pflumm Rds
Olathe, KS 66215
    
    Owned
    
    November 2005
    
    
    4,527Surprise Branch
Bell Road & 114th Ave.
Surprise, AZ 85374
    
    Owned
    
    January 2006
    
    
    $732,757
 
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  46




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##### Table of Contents



PART II
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Stock Information
   Quarter Ended
    
    High
    
    Low
    
    DividendsMarch 31, 2005
    
    
    16.85
    
    
    
    16.56
    
    
    
    .11June 30, 2005
    
    
    15.46
    
    
    
    15.27
    
    
    
    .125September 30, 2005
    
    
    17.10
    
    
    
    17.00
    
    
    
    .125December 31, 2005
    
    
    16.70
    
    
    
    16.59
    
    
    
    .125March 31, 2006
    
    
    17.17
    
    
    
    15.46
    
    
    
    .125June 30, 2006
    
    
    16.49
    
    
    
    15.50
    
    
    
    .125September 30, 2006
    
    
    16.98
    
    
    
    15.73
    
    
    
    .125December 31, 2006
    
    
    18.49
    
    
    
    16.33
    
    
    
    .125
 Dividends
     47




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##### Table of Contents



Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 Item 6. Selected Financial Data.
   At or For the Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Selected Financial Condition Data:Total assets
    
    $
    1,154,473
    
    
    $
    1,140,187
    
    
    $
    1,081,330
    
    
    $
    974,799
    
    
    $
    824,331Loans receivable, net
    
    
    757,033
    
    
    
    672,890
    
    
    
    598,442
    
    
    
    518,496
    
    
    
    448,050Securities available for sale
    
    
    309,729
    
    
    
    387,352
    
    
    
    431,206
    
    
    
    398,691
    
    
    
    324,530Securities held to maturity
    
    
    69
    
    
    
    80
    
    
    
    93
    
    
    
    222
    
    
    
    2,368Trading account assets
    
    
    837
    
    
    
    975
    
    
    
    1,046
    
    
    
    2,111
    
    
    
    1,934Deposits
    
    
    732,757
    
    
    
    669,145
    
    
    
    598,182
    
    
    
    570,697
    
    
    
    525,271Federal Home Loan Bank advances
    
    
    257,000
    
    
    
    319,000
    
    
    
    316,000
    
    
    
    262,500
    
    
    
    235,000Note payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,300Securities sold under repurchase agreements
    
    
    65,141
    
    
    
    59,013
    
    
    
    79,689
    
    
    
    65,728
    
    
    
    517Other debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    15,464
    
    
    
    Stockholders equity
    
    
    67,698
    
    
    
    59,574
    
    
    
    52,660
    
    
    
    48,076
    
    
    
    42,472Shares outstanding
    
    
    5,460,393
    
    
    
    5,384,843
    
    
    
    5,278,934
    
    
    
    5,206,109
    
    
    
    5,193,509Selected Income Statement Data:Interest income
    
    $
    74,095
    
    
    $
    62,056
    
    
    $
    52,266
    
    
    $
    46,434
    
    
    $
    43,493Interest expense
    
    
    43,341
    
    
    
    31,898
    
    
    
    22,718
    
    
    
    20,308
    
    
    
    21,921Net interest income
    
    
    30,754
    
    
    
    30,158
    
    
    
    29,548
    
    
    
    26,126
    
    
    
    21,572Provision for loan losses
    
    
    565
    
    
    
    435
    
    
    
    650
    
    
    
    790
    
    
    
    391Net interest income after provision for loan losses
    
    
    30,189
    
    
    
    29,723
    
    
    
    28,898
    
    
    
    25,336
    
    
    
    21,181Other income:Net gain (loss) on sale of available-for-sale securities
    
    
    (613
    )
    
    
    933
    
    
    
    690
    
    
    
    
    
    
    
    Income (loss) from trading assets
    
    
    1024
    
    
    
    3
    
    
    
    571
    
    
    
    2,647
    
    
    
    (31
    )(Loss) on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (189
    )
    
    
    (1,610
    )
    
    
    Other gain (loss)
    
    
    (39
    )
    
    
    (15
    )
    
    
    (57
    )
    
    
    30
    
    
    
    (350
    )Banking fee income and other income(1)
    
    
    4,085
    
    
    
    3,948
    
    
    
    3,148
    
    
    
    4,108
    
    
    
    2,531Other expenses:Salaries and employee benefits
    
    
    12,478
    
    
    
    11,166
    
    
    
    10,522
    
    
    
    10,086
    
    
    
    7,847Premises and equipment
    
    
    3,744
    
    
    
    3,884
    
    
    
    3,153
    
    
    
    2,722
    
    
    
    2,197Other expenses(2)
    
    
    5,938
    
    
    
    6,026
    
    
    
    5,741
    
    
    
    5,041
    
    
    
    4,713Income before income taxes
    
    
    12,486
    
    
    
    13,516
    
    
    
    13,645
    
    
    
    12,662
    
    
    
    8,574Income taxes
    
    
    4,258
    
    
    
    5,180
    
    
    
    5,436
    
    
    
    5,249
    
    
    
    3,529Net income
    
    $
    8,228
    
    
    $
    8,336
    
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045Common Stock Summary:Basic earnings per share
    
    $
    1.51
    
    
    $
    1.56
    
    
    $
    1.56
    
    
    $
    1.43
    
    
    $
    1.20Diluted earnings per share
    
    
    1.48
    
    
    
    1.48
    
    
    
    1.46
    
    
    
    1.36
    
    
    
    1.15Dividends per share
    
    
    0.50
    
    
    
    0.49
    
    
    
    0.88
    
    
    
    0.21
    
    
    
    0.08Stockholders equity per share
    
    
    12.40
    
    
    
    11.06
    
    
    
    9.98
    
    
    
    9.23
    
    
    
    8.18Diluted weighted average shares outstanding
    
    
    5,572,664
    
    
    
    5,620,556
    
    
    
    5,603,680
    
    
    
    5,455,002
    
    
    
    4,370,021
 48




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##### Table of Contents



At or For the Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Selected Operating Data(3):Performance Ratios and Other Data:Return on average assets
    
    
    0.72
    %
    
    
    0.75
    %
    
    
    0.80
    %
    
    
    0.82
    %
    
    
    0.68
    %Return on average equity
    
    
    12.85
    
    
    
    14.61
    
    
    
    16.30
    
    
    
    16.37
    
    
    
    15.36Average equity to average assets
    
    
    5.62
    
    
    
    5.14
    
    
    
    4.87
    
    
    
    4.93
    
    
    
    5.15Interest rate spread (4)
    
    
    2.56
    
    
    
    2.63
    
    
    
    2.77
    
    
    
    2.90
    
    
    
    2.97Net interest margin (4)
    
    
    2.83
    
    
    
    2.83
    
    
    
    2.93
    
    
    
    3.07
    
    
    
    3.14Average interest-earning assets to average
interest-bearing liabilities
    
    
    106.82
    
    
    
    106.61
    
    
    
    107.09
    
    
    
    107.03
    
    
    
    105.21Total noninterest expenses to average total assets
    
    
    1.94
    
    
    
    1.86
    
    
    
    1.88
    
    
    
    2.04
    
    
    
    1.97Efficiency ratio(5)
    
    
    63.61
    
    
    
    61.80
    
    
    
    59.38
    
    
    
    59.04
    
    
    
    61.22Asset Quality Rations (6):Non-performing assets and troubled debt
restructurings to total assets
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.03
    %Non-performing loans and troubled debt
restructurings to total loans
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.02
    
    
    
    0.00
    
    
    
    0.05Allowance for loan losses to total loans
    
    
    0.78
    
    
    
    0.84
    
    
    
    0.87
    
    
    
    0.88
    
    
    
    0.83Net charge-offs to average loans outstanding
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.08Bank Regulatory Capital Ratios:Tier 1 risk-based capital ratio
    
    
    10.08
    
    
    
    9.96
    
    
    
    10.37
    
    
    
    10.20
    
    
    
    11.14Total risk-based capital ratio
    
    
    10.78
    
    
    
    10.69
    
    
    
    11.13
    
    
    
    10.99
    
    
    
    11.97Tier 1 leverage capital ratio
    
    
    7.41
    
    
    
    6.78
    
    
    
    6.68
    
    
    
    6.08
    
    
    
    6.11
 
 (1)
    
    Consists of service charges, wholesale mortgage banking income, other commissions
and fees, other miscellaneous noninterest income and increase in
cash surrender value of life insurance.(2)
    
    Consists of computer services, consulting fees, marketing and other miscellaneous
noninterest expenses.(3)
    
    With the exception of return on average assets and return on average equity, all ratios are
based on average daily balances.(4)
    
    Interest rate spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average rate on interest-
bearing liabilities. Net interest margin represents net interest income as a percentage of
average interest-earning assets.(5)
    
    Efficiency ratio represents noninterest expenses as a percentage of the aggregate of net
interest income before provision for loan losses and noninterest income, excluding gains on
sales of securities, deposits and loans.(6)
    
    Non-performing loans generally consist of non-accrual loans and non-performing assets
generally consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof. 
 Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 
 Mission
  
 Multiple Market Strategy
    49




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##### Table of Contents



Product Line Diversification
  
 Modern Financial Skills
  50




---



##### 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 and
construction-to-permanent loan lending, and selected consumer lending activities such
as home equity line of credit loans.3.
    
    Diversifying and growing our banking fee income through existing and new fee
income sources such as our overdraft protection program and other deposit fees, loan
fee income from mortgage banking, prepayment penalty fees and other loan fees,
Harrington Wealth Management trust and investment fees, and other retail banking fees.
 51




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##### Table of Contents



The following chart shows the comparison of banking fee income sources for 2006, 2005 and
2004.
 (Dollars in thousands)Year Ended December 31,Banking Fee Type
    
    2006
    
    
    2005
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeMortgage
Brokerage Fees and
Prepayment Penalties
    
    $
    623
    
    
    $
    1,077
    
    
    
    (42.2
    %)
    
    $
    1,077
    
    
    $
    1,290
    
    
    
    (16.5
    %)Other Loan Fees
    
    
    203
    
    
    
    233
    
    
    
    (12.9
    %)
    
    
    233
    
    
    
    226
    
    
    
    3.1
    %Deposit, Other
Retail Banking Fee &
Other Income
    
    
    1,666
    
    
    
    1,293
    
    
    
    28.8
    %
    
    
    1,293
    
    
    
    1022
    
    
    
    26.5
    %Harrington
Wealth Management
Fees
    
    
    848
    
    
    
    724
    
    
    
    17.1
    %
    
    
    724
    
    
    
    610
    
    
    
    18.7
    %BOLI
    
    
    745
    
    
    
    621
    
    
    
    20.0
    %
    
    
    621
    
    
    
    Total
    
    $
    4,085
    
    
    $
    3,948
    
    
    
    3.5
    %
    
    $
    3,948
    
    
    $
    3,148
    
    
    
    25.4
    %
 Over the last three years, we have increased our recurring deposit and retail banking
fee income and Harrington Wealth Management fees. However, mortgage brokerage and
prepayment penalty fees have been volatile. Although we will continue to provide mortgage
brokerage services, we are emphasizing purchase mortgage originations though our banking
platform.
 
 4.
    
    Achieving a high level of performance on our investment portfolio by earning a
pre-tax total return interest income plus net gains and losses on securities and
related total return swaps over one month LIBOR of approximately 1.00% 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 2002 to 2006, the investment
portfolios performance has exceeded our goals and has contributed to our record profit
performance due to favorable selection of securities and spread tightening on these
 52




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##### Table of Contents



securities. In 2006, the portfolio achieved a 87 basis points total return to one month
LIBOR as compared to 50 basis points in 2005. The increase was due primarily to the
favorable performance of our total return swaps during 2006. The total excess return of
the investment portfolio (the total return over one month LIBOR) over the last five
years has achieved a 1.76% total return spread to one month LIBOR and a 1.48% spread
since the portfolio was established in April of 1996.5.
    
    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.
 Together, we believe these factors will contribute to more consistent and growing
profitability. The effect of these factors on our financial results is discussed further in
the following sections.
 
 Critical Accounting Policies
 General
  Allowance for loan losses. Accounting for Contingencies, Accounting by Creditors for Impairment of a Loan Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures
 53




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##### Table of Contents



Trading and Investment Portfolio
 Hedging Activity. Accounting for Derivative Instruments and Hedging Activities
 
 Results of Operations
 Summary of Earnings
  54




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##### Table of Contents



Net Interest Income
   55




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##### Table of Contents



Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-earning assets:Loans receivable(1)
    
    $
    715,520
    
    
    $
    54,963
    
    
    
    7.68
    %
    
    $
    636,490
    
    
    $
    43,269
    
    
    
    6.80
    %
    
    $
    561,665
    
    
    $
    36,166
    
    
    
    6.44
    %Securities and trading account
assets(2)
    
    
    347,917
    
    
    
    18,051
    
    
    
    5.19
    
    
    
    408,753
    
    
    
    17,914
    
    
    
    4.38
    
    
    
    419,716
    
    
    
    15,439
    
    
    
    3.68FHLB stock
    
    
    15,395
    
    
    
    826
    
    
    
    5.37
    
    
    
    16,237
    
    
    
    709
    
    
    
    4.37
    
    
    
    14,197
    
    
    
    573
    
    
    
    4.04Cash and cash equivalents(3)
    
    
    11,252
    
    
    
    255
    
    
    
    2.27
    
    
    
    9,602
    
    
    
    164
    
    
    
    1.71
    
    
    
    12,318
    
    
    
    88
    
    
    
    0.71Total interest-earning assets
    
    
    1,090,084
    
    
    
    74,095
    
    
    
    6.80
    
    
    
    1,071,082
    
    
    
    62,056
    
    
    
    5.79
    
    
    
    1,007,896
    
    
    
    52,266
    
    
    
    5.18Noninterest-earning assets
    
    
    49,316
    
    
    
    
    
    
    
    
    
    
    
    38,813
    
    
    
    
    
    
    
    
    
    
    
    24,570Total assets
    
    $
    1,139,400
    
    
    
    
    
    
    
    
    
    
    $
    1,109,895
    
    
    
    
    
    
    
    
    
    
    $
    1,032,466Interest-bearing liabilities:Deposits:NOW and money market
accounts
    
    $
    99,226
    
    
    $
    2,214
    
    
    
    2.23
    
    
    $
    119,742
    
    
    $
    1,945
    
    
    
    1.62
    
    
    $
    120,353
    
    
    $
    1,154
    
    
    
    0.96Passbook accounts and
certificates of deposit
    
    
    548,784
    
    
    
    23,376
    
    
    
    4.26
    
    
    
    475,374
    
    
    
    13,723
    
    
    
    2.89
    
    
    
    442,679
    
    
    
    9,475
    
    
    
    2.14Total deposits
    
    
    648,010
    
    
    
    25,590
    
    
    
    3.95
    
    
    
    595,116
    
    
    
    15,668
    
    
    
    2.63
    
    
    
    563,032
    
    
    
    10,629
    
    
    
    1.89FHLB advances(4)
    
    
    286,452
    
    
    
    13,912
    
    
    
    4.86
    
    
    
    314,066
    
    
    
    12,732
    
    
    
    4.05
    
    
    
    284,977
    
    
    
    9,285
    
    
    
    3.26Reverse repurchase agreements
    
    
    60,212
    
    
    
    1,772
    
    
    
    2.98
    
    
    
    69,720
    
    
    
    1,928
    
    
    
    2.77
    
    
    
    75,541
    
    
    
    1,981
    
    
    
    2.62Other borrowings(5)
    
    
    25,774
    
    
    
    2,067
    
    
    
    8.13
    
    
    
    25,774
    
    
    
    1,570
    
    
    
    6.09
    
    
    
    17,623
    
    
    
    823
    
    
    
    4.67Total interest-bearing liabilities
    
    
    1,020,448
    
    
    
    43,341
    
    
    
    4.24
    
    
    
    1,004,676
    
    
    
    31,898
    
    
    
    3.16
    
    
    
    941,173
    
    
    
    22,718
    
    
    
    2.41Noninterest-bearing deposits
    
    
    48,660
    
    
    
    
    
    
    
    
    
    
    
    41,579
    
    
    
    
    
    
    
    
    
    
    
    31,563Noninterest-bearing liabilities
    
    
    6,265
    
    
    
    
    
    
    
    
    
    
    
    6,564
    
    
    
    
    
    
    
    
    
    
    
    9,358Total liabilities
    
    
    1,075,373
    
    
    
    
    
    
    
    
    
    
    
    1,052,819
    
    
    
    
    
    
    
    
    
    
    
    982,094Stockholders equity
    
    
    64,027
    
    
    
    
    
    
    
    
    
    
    
    57,076
    
    
    
    
    
    
    
    
    
    
    
    50,372Total liabilities and stockholders
equity
    
    $
    1,139,400
    
    
    
    
    
    
    
    
    
    
    $
    1,109,895
    
    
    
    
    
    
    
    
    
    
    $
    1,032,466Net interest-earning assets
(liabilities)
    
    $
    69,636
    
    
    
    
    
    
    
    
    
    
    $
    66,406
    
    
    
    
    
    
    
    
    
    
    $
    66,723Net interest income/interest rate
spread
    
    
    
    
    
    $
    30,754
    
    
    
    2.56
    
    
    
    
    
    
    $
    30,158
    
    
    
    2.63
    
    
    
    
    
    
    $
    29,548
    
    
    
    2.77Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.83
    
    
    
    
    
    
    
    
    
    
    
    2.83
    
    
    
    
    
    
    
    
    
    
    
    2.93Ratio of average interest-earnings
assets to average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    106.82
    
    
    
    
    
    
    
    
    
    
    
    106.61
    
    
    
    
    
    
    
    
    
    
    
    107.09
 
 (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 repricing characteristics of our floating-rate FHLB advances. See Asset and
Liability Management.(5)
    
    Consists of a note payable under a revolving line of credit. 56




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Rate/Volume Analysis
  Year Ended December 31, 2006
    
    
    Year Ended December 31, 2005Compared to Year Ended December 31, 2005
    
    
    Compared to Year Ended December 31, 2004Increase (decrease) due to
    
    
    Increase (decrease) due toTotal Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total NetRate/
    
    
    Increase
    
    
    
    
    
    
    
    
    
    
    Rate/
    
    
    IncreaseRate
    
    
    Volume
    
    
    Volume
    
    
    (Decrease)
    
    
    Rate
    
    
    Volume
    
    
    Volume
    
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable
    
    $
    5,601
    
    
    $
    5,374
    
    
    $
    719
    
    
    $
    11,694
    
    
    $
    2,022
    
    
    $
    4,819
    
    
    $
    262
    
    
    $
    7,103Securities and trading account
Assets (1)
    
    
    3,311
    
    
    
    (2,665
    )
    
    
    (509
    )
    
    
    137
    
    
    
    2,938
    
    
    
    (403
    )
    
    
    (60
    )
    
    
    2,475FHLB stock
    
    
    162
    
    
    
    (37
    )
    
    
    (8
    )
    
    
    117
    
    
    
    47
    
    
    
    82
    
    
    
    7
    
    
    
    136Cash and cash equivalents (2)
    
    
    54
    
    
    
    28
    
    
    
    9
    
    
    
    91
    
    
    
    123
    
    
    
    (19
    )
    
    
    (28
    )
    
    
    76Total net change in income on
interest-earning assets
    
    
    9,128
    
    
    
    2,700
    
    
    
    211
    
    
    
    12,039
    
    
    
    5,130
    
    
    
    4,479
    
    
    
    181
    
    
    
    9,790Interest-bearing liabilities:DepositsNOW and money market
accounts
    
    
    730
    
    
    
    (332
    )
    
    
    (129
    )
    
    
    269
    
    
    
    794
    
    
    
    (6
    )
    
    
    3
    
    
    
    791Passbook accounts and
certificates of deposit
    
    
    6,513
    
    
    
    2,122
    
    
    
    1,018
    
    
    
    9,653
    
    
    
    3,320
    
    
    
    700
    
    
    
    228
    
    
    
    4,248Total deposits
    
    
    7,243
    
    
    
    1,790
    
    
    
    889
    
    
    
    9,922
    
    
    
    4,114
    
    
    
    694
    
    
    
    231
    
    
    
    5,039FHLB advances (3)
    
    
    2,544
    
    
    
    (1,118
    )
    
    
    (246
    )
    
    
    1,180
    
    
    
    2,251
    
    
    
    948
    
    
    
    248
    
    
    
    3,447Reverse repurchase agreements
    
    
    146
    
    
    
    (263
    )
    
    
    (39
    )
    
    
    (156
    )
    
    
    113
    
    
    
    (150
    )
    
    
    (16
    )
    
    
    (53
    )Other borrowings (4)
    
    
    526
    
    
    
    
    
    
    
    (29
    )
    
    
    497
    
    
    
    250
    
    
    
    374
    
    
    
    123
    
    
    
    747Total net change in expense on
interest-bearing liabilities
    
    
    10,459
    
    
    
    409
    
    
    
    575
    
    
    
    11,443
    
    
    
    6,728
    
    
    
    1,866
    
    
    
    586
    
    
    
    9,180Change in net interest income
    
    $
    (1,331
    )
    
    $
    2,291
    
    
    $
    (364
    )
    
    $
    596
    
    
    $
    (1,598
    )
    
    $
    2,613
    
    
    $
    (405
    )
    
    $
    610
 
 (1)
    
    Consists of securities classified as available for sale and held to maturity and trading
account assets.(2)
    
    Consists of cash and due from banks and federal funds sold.(3)
    
    Interest on FHLB advances is net of cash flow hedging costs. We use interest rate swaps to
hedge the short-term repricing characteristics of our floating-rate FHLB advances. See
Asset and Liability Management.(4)
    
    Consists of a note payable under a revolving line of credit and the subordinated
debt. 57




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Interest Income
 Interest Expense
 Provision for Loan Losses
 Other Income
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Net gain (loss) on sale of available-for-sale securities
    
    $
    (613
    )
    
    $
    933
    
    
    $
    690Income from trading assets
    
    
    1,024
    
    
    
    3
    
    
    
    571Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (189
    )Other gain (loss)
    
    
    (39
    )
    
    
    (15
    )
    
    
    (57
    )Banking fee income and other income (1)
    
    
    4,085
    
    
    
    3,948
    
    
    
    3,148Total other income
    
    $
    4,457
    
    
    $
    4,869
    
    
    $
    4,163
 
 (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.   58




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##### Table of Contents



Other Expenses
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Salaries and employee benefits
    
    $
    12,478
    
    
    $
    11,166
    
    
    $
    10,522Premises and equipment
    
    
    3,744
    
    
    
    3,884
    
    
    
    3,153Insurance premiums
    
    
    417
    
    
    
    509
    
    
    
    486Marketing
    
    
    453
    
    
    
    403
    
    
    
    427Computer services
    
    
    841
    
    
    
    785
    
    
    
    696Professional fees
    
    
    998
    
    
    
    1,271
    
    
    
    1,188Office expenses and supplies
    
    
    881
    
    
    
    870
    
    
    
    824Other (1)
    
    
    2,348
    
    
    
    2,188
    
    
    
    2,120Total other expenses
    
    $
    22,160
    
    
    $
    21,076
    
    
    $
    19,416
 
 (1)
    
    Consists primarily of regulatory fees, and other miscellaneous expenses.     59




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##### Table of Contents



Income Taxes
 
 Changes in Financial Condition
 General
 Cash and Cash Equivalents
 Securities
  Trading Account Assets.
 60




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##### Table of Contents



Loans Receivable.
 Allowance for Loan Losses.
 Prepaid expenses and other assets.
 Deposits.
 Borrowings.
 
 61




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##### Table of Contents



Stockholders Equity
 
 Asset and Liability Management
      62




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##### Table of Contents



i.e.,
    Accounting for Derivative Instruments and Hedging Activities,
  63




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i.e i.e
     64




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Change In Interest Rates (In Basis Points)(1)2006
    
    -300
    
    
    -200
    
    
    -100
    
    
    -
    
    
    +100
    
    
    +200
    
    
    +300(Dollars in Thousands)Market value gain (loss) in assets
    
    $
    27,788
    
    
    $
    20,864
    
    
    $
    12,159
    
    
    
    
    
    
    $
    (15,076
    )
    
    $
    (31,987
    )
    
    $
    (49,751
    )Market value gain (loss) of liabilities
    
    
    (21,404
    )
    
    
    (14,831
    )
    
    
    (7,577
    )
    
    
    
    
    
    
    7,653
    
    
    
    15,359
    
    
    
    23,124Market value gain (loss) of net assets
before interest rate contracts
    
    
    6,384
    
    
    
    6,033
    
    
    
    4,582
    
    
    
    
    
    
    
    (7,423
    )
    
    
    (16,628
    )
    
    
    (26,627
    )Market value gain (loss) of interest
rate contracts
    
    
    (12,760
    )
    
    
    (8,295
    )
    
    
    (4,044
    )
    
    
    
    
    
    
    3,845
    
    
    
    7,515
    
    
    
    11,015Total change in MVPE(2)
    
    $
    (6,376
    )
    
    $
    (2,262
    )
    
    $
    538
    
    
    
    
    
    
    $
    (3,578
    )
    
    $
    (9,113
    )
    
    $
    (15,612
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -6.35
    %
    
    
    -2.25
    %
    
    
    .54
    %
    
    
    
    
    
    
    -3.56
    %
    
    
    -9.08
    %
    
    
    -15.55
    %Total assets of Los Padres Bank
    
    
    -0.74
    %
    
    
    -0.35
    %
    
    
    0.05
    %
    
    
    
    
    
    
    -0.20
    %
    
    
    -0.57
    %
    
    
    -1.03
    %
 Change In Interest Rates (In Basis Points)(1)2005
    
    -300
    
    
    -200
    
    
    -100
    
    
    -
    
    
    +100
    
    
    +200
    
    
    +300(Dollars in Thousands)Market value gain (loss) in assets
    
    $
    34,553
    
    
    $
    25,333
    
    
    $
    14,260
    
    
    
    
    
    
    $
    (17,231
    )
    
    $
    (36,436
    )
    
    $
    (56,745
    )Market value gain (loss) of liabilities
    
    
    (23,899
    )
    
    
    (16,488
    )
    
    
    (8,421
    )
    
    
    
    
    
    
    8,541
    
    
    
    17,184
    
    
    
    26,039Market value gain (loss) of net assets
before interest rate contracts
    
    
    10,654
    
    
    
    8,845
    
    
    
    5,839
    
    
    
    
    
    
    
    (8,690
    )
    
    
    (19,252
    )
    
    
    (30,706
    )Market value gain (loss) of interest
rate contracts
    
    
    (14,259
    )
    
    
    (9,237
    )
    
    
    (4,493
    )
    
    
    
    
    
    
    4,235
    
    
    
    8,258
    
    
    
    12,069Total change in MVPE(2)
    
    $
    (3,605
    )
    
    $
    (392
    )
    
    $
    1,346
    
    
    
    
    
    
    $
    (4,455
    )
    
    $
    (10,994
    )
    
    $
    (18,637
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -3.76
    %
    
    
    -0.41
    %
    
    
    1.40
    %
    
    
    
    
    
    
    -4.65
    %
    
    
    -11.47
    %
    
    
    -19.44
    %Total assets of Los Padres Bank
    
    
    -0.55
    %
    
    
    -0.22
    %
    
    
    0.01
    %
    
    
    
    
    
    
    -0.27
    %
    
    
    -0.72
    %
    
    
    -1.28
    %
 
 (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on our pre-tax MVPE of $95.9 million at December 31, 2005.  
 Liquidity and Capital Resources
 Liquidity.
 65




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66




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Capital Resources.
 
 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
    
    $
    556,284
    
    
    $
    536,097
    
    
    $
    15,606
    
    
    $
    4,422
    
    
    $
    159FHLB advances
    
    
    257,000
    
    
    
    238,000
    
    
    
    
    
    
    
    19,000
    
    
    
    Reverse repurchase agreements
    
    
    65,141
    
    
    
    20,141
    
    
    
    30,000
    
    
    
    15,000
    
    
    
    Leases
    
    
    4,460
    
    
    
    1,244
    
    
    
    2,075
    
    
    
    963
    
    
    
    178Other debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Due from broker
    
    
    142
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    Total contractual
obligations
    
    $
    908,801
    
    
    $
    795,624
    
    
    $
    47,681
    
    
    $
    39,385
    
    
    $
    26,111
 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
    
    $
    38,419
    
    
    $
    25,534
    
    
    $
    8,903
    
    
    $
    1,703
    
    
    $
    2,279Consumer lines of credit (1)
    
    
    48,532
    
    
    
    2,520
    
    
    
    
    
    
    
    650
    
    
    
    45,362Undisbursed portion of loans in process
    
    
    83,855
    
    
    
    45,411
    
    
    
    38,444
    
    
    
    
    
    
    
    Approved but, not funded mortgage loans
    
    
    7,463
    
    
    
    7,463
    
    
    
    
    
    
    
    
    
    
    
    Approved but, not funded commercial
loans
    
    
    540
    
    
    
    540
    
    
    
    
    
    
    
    
    
    
    
    Approved but not funded consumer loans
    
    
    300
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    4,387
    
    
    
    4,387
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    183,496
    
    
    $
    86,155
    
    
    $
    47,347
    
    
    $
    2,353
    
    
    $
    47,641
 
 (1)
    
    Lines of credit with no stated maturity date are included in commitments for less than
one year. 67




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##### Table of Contents



Off-Balance Sheet Arrangements
   Contract orNotional
    
    Estimated
    
    Weighted-AverageAmount
    
    Fair Value
    
    Interest RateReceivable
    
    PayableDecember 31, 2006 -Interest rate swaps  pay fixedreceive 3-month LIBOR
    
    $
    164,000
    
    
    $
    587
    
    
    
    5.36
    %
    
    
    4.73
    %December 31, 2005 -Interest rate swaps  pay fixed
receive 3-month LIBOR
    
    $
    152,000
    
    
    $
    33
    
    
    
    4.39
    %
    
    
    4.42
    %
  Maturities
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    52,000
    
    
    $
    4,000
    
    
    $
    60,000
    
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    28,000Weighted-average
payable rate
    
    
    3.80
    %
    
    
    3.78
    %
    
    
    5.25
    %
    
    
    6.29
    %
    
    
    4.90
    %
    
    
    4.84
    %Weighted-average
receivable rate
    
    
    5.36
    %
    
    
    5.37
    %
    
    
    5.36
    %
    
    
    5.36
    %
    
    
    5.38
    %
    
    
    5.36
    %
  68




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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.
  69




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PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  2006
    
    71REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  2005 and 2004
    
    72CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Statements of Financial Condition  December 31, 2006 and 2005
    
    73Consolidated Statements of Earnings for the Years Ended December 31, 2006, 2005 and 2004
    
    74Consolidated Statements of Stockholders Equity and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004
    
    75Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
    
    77Notes to Consolidated Financial Statements
    
    79
 70




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 71




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 72




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
 December 31,2006
    
    
    2005ASSETSCash and cash equivalents
    
    $
    21,178
    
    
    $
    19,312Trading account assets
    
    
    837
    
    
    
    975Securities available for sale at fair value
    
    
    309,729
    
    
    
    387,352Securities held to maturity (fair value of $71 in 2006 and $84 in 2005)
    
    
    69
    
    
    
    80Loans receivable, net of allowance for loan losses of $5,914 in 2006
and $5,661 in 2005
    
    
    757,033
    
    
    
    672,890Accrued interest receivable
    
    
    5,315
    
    
    
    4,463Premises and equipment, net
    
    
    15,581
    
    
    
    10,276Due from broker
    
    
    142
    
    
    
    Prepaid expenses and other assets
    
    
    4,959
    
    
    
    3,783Investment in FHLB stock, at cost
    
    
    14,615
    
    
    
    16,364Income taxes receivable
    
    
    112
    
    
    
    251Bank-owned life insurance
    
    
    18,472
    
    
    
    17,621Deferred taxes
    
    
    
    
    
    
    137Goodwill
    
    
    5,496
    
    
    
    5,496Core deposit intangible, net
    
    
    935
    
    
    
    1,187TOTAL
    
    $
    1,154,473
    
    
    $
    1,140,187LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Interest bearing
    
    $
    677,665
    
    
    $
    619,213Noninterest bearing
    
    
    55,092
    
    
    
    49,932Total deposits
    
    
    732,757
    
    
    
    669,145FHLB advances
    
    
    257,000
    
    
    
    319,000Securities sold under repurchase agreements
    
    
    65,141
    
    
    
    59,013Subordinated debt
    
    
    25,774
    
    
    
    25,774Due to broker
    
    
    
    
    
    
    2,474Accrued interest payable and other liabilities
    
    
    5,005
    
    
    
    5,207Deferred taxes
    
    
    1,098
    
    
    
    Total liabilities
    
    
    1,086,775
    
    
    
    1,080,613COMMITMENTS AND CONTINGENCIES (Notes 2 and 14)STOCKHOLDERS EQUITY:Preferred stock, $.01 par value; 1,200,000 shares authorized;
none issued and outstandingCommon stock, $.01 par value; 10,800,000 shares authorized;
5,460,393 shares issued and outstanding as of December 31, 2006
and 5,384,843 shares issued and outstanding December 31, 2005
    
    
    55
    
    
    
    54Additional paid-in capital
    
    
    33,332
    
    
    
    32,059Retained earnings
    
    
    34,964
    
    
    
    29,458Accumulated other comprehensive loss, net of tax
    
    
    (653
    )
    
    
    (1,997
    )Total stockholders equity
    
    
    67,698
    
    
    
    59,574TOTAL
    
    $
    1,154,473
    
    
    $
    1,140,187
  73




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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share and per share data)
 Year EndedDecember 31,2006
    
    
    2005
    
    
    2004INTEREST INCOME:Interest on loans
    
    $
    54,963
    
    
    $
    43,269
    
    
    $
    36,166Interest and dividends on securities
    
    
    19,132
    
    
    
    18,787
    
    
    
    16,100Total interest income
    
    
    74,095
    
    
    
    62,056
    
    
    
    52,266INTEREST EXPENSE:Interest on deposits
    
    
    25,590
    
    
    
    15,668
    
    
    
    10,629Interest on FHLB advances, subordinated debt & repurchase agreements
    
    
    17,751
    
    
    
    16,230
    
    
    
    12,089Total interest expense
    
    
    43,341
    
    
    
    31,898
    
    
    
    22,718NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    
    
    30,754
    
    
    
    30,158
    
    
    
    29,548PROVISION FOR LOAN LOSSES
    
    
    565
    
    
    
    435
    
    
    
    650NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    30,189
    
    
    
    29,723
    
    
    
    28,898OTHER INCOME (LOSS):Net gain (loss) on sale of available-for-sale securities
    
    
    (613
    )
    
    
    933
    
    
    
    690Income from trading assets
    
    
    1,024
    
    
    
    3
    
    
    
    571Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (189
    )Other (loss)
    
    
    (39
    )
    
    
    (15
    )
    
    
    (57
    )Increase in cash surrender value of life insurance
    
    
    745
    
    
    
    621
    
    
    
    Banking fee income and other income
    
    
    3,340
    
    
    
    3,327
    
    
    
    3,148Total other income
    
    
    4,457
    
    
    
    4,869
    
    
    
    4,163OTHER EXPENSES:Salaries and employee benefits
    
    
    12,478
    
    
    
    11,166
    
    
    
    10,522Premises and equipment
    
    
    3,744
    
    
    
    3,884
    
    
    
    3,153Insurance premiums
    
    
    417
    
    
    
    509
    
    
    
    486Marketing
    
    
    453
    
    
    
    403
    
    
    
    427Computer services
    
    
    841
    
    
    
    785
    
    
    
    696Professional fees
    
    
    998
    
    
    
    1,271
    
    
    
    1,188Office expenses and supplies
    
    
    881
    
    
    
    870
    
    
    
    824Other
    
    
    2,348
    
    
    
    2,188
    
    
    
    2,120Total other expenses
    
    
    22,160
    
    
    
    21,076
    
    
    
    19,416INCOME BEFORE INCOME TAXES
    
    
    12,486
    
    
    
    13,516
    
    
    
    13,645INCOME TAXES
    
    
    4,258
    
    
    
    5,180
    
    
    
    5,436NET INCOME
    
    $
    8,228
    
    
    $
    8,336
    
    
    $
    8,209BASIC EARNINGS PER SHARE
    
    $
    1.51
    
    
    $
    1.56
    
    
    $
    1.56DILUTED EARNINGS PER SHARE
    
    $
    1.48
    
    
    $
    1.48
    
    
    $
    1.46BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    5,441,075
    
    
    
    5,347,757
    
    
    
    5,256,030DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    5,572,664
    
    
    
    5,620,556
    
    
    
    5,603,680
  74




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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY and COMPREHENSIVE INCOME
(Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Compre-
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    hensive
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Loss
    
    
    EquityBALANCE, DECEMBER 31, 2003
    
    
    5,206,109
    
    
    
    52
    
    
    $
    30,710
    
    
    $
    20,073
    
    
    
    
    
    
    $
    (2,759
    )
    
    $
    48,076Comprehensive IncomeNet Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,209
    
    
    $
    8,209
    
    
    
    
    
    
    
    8,209Other comprehensive income, net of taxUnrealized gains (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (324
    )
    
    
    (324
    )
    
    
    (324
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    828
    
    
    
    828Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,713Stock options exercised,
including
tax benefit of $0
    
    
    72,825
    
    
    
    1
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516Dividends on Common Stock
at $.41 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,645
    )
    
    
    
    
    
    
    
    
    
    
    (4,645
    )BALANCE, DECEMBER 31, 2004
    
    
    5,278,934
    
    
    
    53
    
    
    
    31,225
    
    
    
    23,637
    
    
    
    
    
    
    
    (2,255
    )
    
    
    52,660Comprehensive IncomeNet Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,336
    
    
    $
    8,336
    
    
    
    
    
    
    
    8,336Other comprehensive income, net of taxUnrealized gains (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,270
    )
    
    
    (2,270
    )
    
    
    (2,270
    )Effective portion of change in
fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,528
    
    
    
    2,528
    
    
    
    2,528Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,594Stock options exercised,
including
tax benefit of $250
    
    
    105,909
    
    
    
    1
    
    
    
    834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    835Dividends on Common Stock
at $. 485 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,515
    )
    
    
    
    
    
    
    
    
    
    
    (2,515
    )BALANCE, DECEMBER 31, 2005
    
    
    5,384,843
    
    
    
    54
    
    
    
    32,059
    
    
    
    29,458
    
    
    
    
    
    
    
    (1,997
    )
    
    
    59,574Comprehensive IncomeNet Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,228
    
    
    $
    8,228
    
    
    
    
    
    
    
    8,228Other comprehensive income, net of taxUnrealized gains (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,008
    
    
    
    1,008
    
    
    
    1,008Effective portion of change in
fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336
    
    
    
    336
    
    
    
    336Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,572Stock options exercised,
including
tax benefit of $397
    
    
    75,550
    
    
    
    1
    
    
    
    825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    826Stock options earned
    
    
    
    
    
    
    
    
    
    
    448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    448Dividends on Common Stock
at $.50 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,722
    )
    
    
    
    
    
    
    
    
    
    
    (2,722
    )BALANCE, DECEMBER 31, 2006
    
    
    5,460,393
    
    
    $
    55
    
    
    $
    33,332
    
    
    $
    34,964
    
    
    
    
    
    
    $
    (653
    )
    
    $
    67,698
  75




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HARRINGTON WEST FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 Dollars in thousands)
 Year endedDecember 31,2006
    
    
    2005
    
    
    2004DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding (loss) arising during period,
net of tax (benefit) expense of
$542, ($1,123), and $58 for
2006, 2005 and 2004, respectively
    
    $
    613
    
    
    $
    (1,706
    )
    
    $
    85Less: Reclassification adjustment for gains (losses) included
in net income, net of tax
expense (benefit) of ($218),
$369 and
$281 for 2006, 2005 and 2004,
respectively
    
    
    (395
    )
    
    
    564
    
    
    
    409Net unrealized (loss) on securities, net of tax (benefit) expense
of $760, ($1,492) and ($223) for
2006, 2005 and 2004,
respectively
    
    $
    1,008
    
    
    $
    (2,270
    )
    
    $
    (324
    )Unrealized net gain on cash flow hedges, net of tax expense
of $212, $1,733 and $631 for
2006, 2005 and 2004
respectively
    
    $
    339
    
    
    $
    2,524
    
    
    $
    919Less: Reclassification adjustment for net gains (losses) on cash
flow hedges included in net
income, net of tax (benefit)
expense of ($2), ($2) and $63
for 2006, 2005 and 2004,
respectively
    
    
    3
    
    
    
    (4
    )
    
    
    91Net unrealized gain on cash flow hedges, net of tax expense
of $214, $1,735 and $569 for
2006, 2005 and 2004,
respectively
    
    $
    336
    
    
    $
    2,528
    
    
    $
    828Total change in Other Comprehensive Income
    
    $
    1,344
    
    
    $
    258
    
    
    $
    504
  76




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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Year EndedDecember 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    8,228
    
    
    $
    8,336
    
    
    $
    8,209Adjustments to reconcile net income to net cash
provided by
operating activities:Accretion of deferred loan fees and costs
    
    
    (395
    )
    
    
    767
    
    
    
    338Depreciation and amortization
    
    
    1,475
    
    
    
    1,452
    
    
    
    1,204Amortization of premiums and discounts on loans
receivable and securities
    
    
    2,075
    
    
    
    2,589
    
    
    
    3,171Deferred income taxes
    
    
    505
    
    
    
    1,023
    
    
    
    781Provision for loan losses
    
    
    565
    
    
    
    435
    
    
    
    650Activity in trading account assets
    
    
    135
    
    
    
    75
    
    
    
    1,059Loss (gain) on sale of trading account securities
    
    
    3
    
    
    
    (4
    )
    
    
    Loss (gain) on sale of available-for-sale securities
    
    
    613
    
    
    
    (933
    )
    
    
    (690
    )FHLB stock dividend
    
    
    (808
    )
    
    
    (675
    )
    
    
    (557
    )Earnings in bank owned life insurance
    
    
    (745
    )
    
    
    (621
    )
    
    
    Increase in accrued interest receivable
    
    
    (852
    )
    
    
    (1,141
    )
    
    
    (394
    )(Increase) decrease in income taxes (payable)
receivable
    
    
    139
    
    
    
    (713
    )
    
    
    (250
    )(Increase) decrease in prepaid expenses and other
assets
    
    
    (1,479
    )
    
    
    1,019
    
    
    
    (1,877
    )Stock options expensed
    
    
    448
    
    
    
    
    
    
    
    Decrease in accrued interest payable and other
liabilities
    
    
    (2,321
    )
    
    
    (507
    )
    
    
    (1,684
    )Net cash provided by operating activities
    
    
    7,586
    
    
    
    11,102
    
    
    
    9,960CASH FLOWS FROM INVESTING ACTIVITIES:Net increase in loans receivable
    
    
    (85,381
    )
    
    
    (75,783
    )
    
    
    (81,505
    )Proceeds from sales of securities available for sale
    
    
    44,327
    
    
    
    61,819
    
    
    
    28,316Purchases of securities available for sale
    
    
    (63,875
    )
    
    
    (105,207
    )
    
    
    (154,529
    )Principal paydowns on securities available for sale
    
    
    96,261
    
    
    
    84,446
    
    
    
    91,479Principal paydowns on securities held to maturity
    
    
    13
    
    
    
    13
    
    
    
    129Purchase of bank-owned life insurance
    
    
    
    
    
    
    (17,000
    )
    
    
    Proceeds from sale of real estate acquired through
foreclosure
    
    
    1,062
    
    
    
    
    
    
    
    Acquisition, net of cash acquired
    
    
    
    
    
    
    (1,954
    )
    
    
    Purchase of premises and equipment
    
    
    (6,528
    )
    
    
    (2,414
    )
    
    
    (3,463
    )Redemption (purchase) of FHLB stock
    
    
    2,557
    
    
    
    (555
    )
    
    
    (1,152
    )Net cash used in investing activities
    
    
    (11,564
    )
    
    
    (56,635
    )
    
    
    (120,725
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    63,612
    
    
    
    70,963
    
    
    
    27,504(Decrease) increase in securities sold under
agreements to repurchase
    
    
    6,128
    
    
    
    (20,676
    )
    
    
    13,962Increase (decrease) in FHLB advances
    
    
    (62,000
    )
    
    
    3,000
    
    
    
    53,500Increase in subordinated debt
    
    
    
    
    
    
    
    
    
    
    10,310Exercise of stock options on common stock, including
tax benefits
    
    
    826
    
    
    
    835
    
    
    
    516Dividends paid on common stock
    
    
    (2,722
    )
    
    
    (2,515
    )
    
    
    (4,645
    )Net cash provided by financing activities
    
    
    5,844
    
    
    
    51,607
    
    
    
    101,147NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    1,866
    
    
    
    6,074
    
    
    
    (9,618
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    19,312
    
    
    
    13,238
    
    
    
    22,856CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    21,178
    
    
    $
    19,312
    
    
    $
    13,238
   77




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HARRINGTON WEST FINANCIAL GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Year EndedDecember 31,2006
    
    
    2005
    
    
    2004SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -Cash paid during the year for:Interest
    
    $
    44,180
    
    
    $
    30,169
    
    
    $
    18,803Income taxes
    
    $
    3,689
    
    
    $
    4,016
    
    
    $
    5,522SUPPLEMENTAL NON-CASH DISCLOSUREDue to/(from) broker
    
    $
    (142
    )
    
    $
    2,474
    
    
    $
    0
    78




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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 POLICIESBusiness of the Company- Harrington West Financial Group, Inc. is a savings and loan holding
company incorporated on August 29, 1995 to acquire and hold all of the outstanding common
stock of Los Padres Bank (the Bank), referred to herein on a consolidated basis as the
Company. The Bank is a federally chartered savings bank which operates 16 branches serving
individuals and small to medium-sized businesses. Eleven banking facilities are operated on
the California Central Coast, three banking facilities are located in Kansas, and operated as
a division under the Harrington Bank brand, and two banking facilities are located in
Scottsdale, Arizona.On February 1, 1999, the Bank purchased a 49% interest in Harrington Wealth Management Company
(HWMC). HWMC offers trust and investment management services to the customers of the Bank.
On October 31, 2001, the Bank purchased the remaining 51% interest in HWMC. Beginning in
November 2001, HWMC became a wholly owned subsidiary of the Bank and is consolidated into the
Bank. HWMC performs management of investment portfolios through knowledge and analysis of the
customers investment needs, risk tolerance, tax situation and investment horizon. At
December 31, 2006, HWMC administered approximately 439 accounts and had $175.3 million of
assets under management that are not included on the consolidated statements of financial
condition. For the years ended December 31, 2006, 2005 and 2004, HWMC generated revenues of
$848,000, $726,000 and $614,000, respectively.On November 3, 2001, the Bank purchased from Harrington Bank, FSB, its $75 million bank
located in Shawnee Mission, Kansas, in the heart of the Kansas City metropolis.Basis of Presentation-. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of America and
general practices within the banking industry. The following is a summary of significant
principles used in the preparation of the accompanying consolidated financial statements. In
preparing the consolidated financial statements, management of the Company has made a number
of estimates and assumptions relating to the reporting of assets and liabilities, including
the allowance for loan losses, valuation of investment securities, fair value of derivatives,
fair value of financial instruments and stock-based compensation. Actual results could differ
from those estimates.Principles of Consolidation The consolidated financial statements include the accounts of
Harrington West Financial Group, Inc. and its wholly owned subsidiary, Los Padres Bank (the
Bank), and the Banks wholly owned subsidiaries. All intercompany transactions and accounts
have been eliminated in consolidation. The Company also has two wholly-owned subsidiaries
that are statutory business trusts (the Trusts). In accordance with Financial Accounting
Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities(FIN No.
46R), the Trusts are not consolidated into the accounts of Harrington West Financial Group,
Inc.Segments- The Company has a single operating segment, banking operations.Cash and Cash Equivalents- For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.Trading Account Assets- Trading account assets are debt and equity securities, as well as
derivative instruments not receiving hedge treatment (as further described in Note 15) that
are bought and held
 79




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Available for Sale Securities
  Held to Maturity Securities
 Loans Receivable
 Loan Interest Income and Fees
   Allowance for Loan Losses
 80




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Accounting by Creditors for Impairment of a Loan
    Transfers of Financial Assets
 Premises and Equipment
  Real Estate Acquired through Foreclosure
 81




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##### Table of Contents



Income Taxes
 Investment in Federal Home Loan Bank of San Francisco Stock 
 Bank Owned Life Insurance
 Core Deposit Intangibles
 Goodwill
 Derivatives Held for Asset and Liability Management Purposes Accounting for
Derivative Instruments and Hedging Activities
   82




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Securities Sold Under Repurchase Agreements
 Comprehensive Income
 Loss Contingencies
 Fair Value of Financial Instruments
  Cash Flows
 Adoption of new accounting standards:
 Share-based Payment
 83




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##### Table of Contents



Accounting for Stock
Issued to Employees, Accounting for Stock-Based Compensation
  Dollars in thousands, except per share data
    
    Year ended December 31,2005
    
    
    2004Net income, as reported
    
    $
    8,336
    
    
    $
    8,209Deduct:Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effect
    
    
    236
    
    
    
    151Pro forma net income
    
    $
    8,100
    
    
    $
    8,058Earnings per share:Basic earnings per share:As reported
    
    $
    1.56
    
    
    $
    1.56Pro forma
    
    $
    1.51
    
    
    $
    1.46
 84




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##### Table of Contents



Dollars in thousands, except per share data
    
    Year ended December 31,2005
    
    2004Diluted earnings per share:As reported
    
    $
    1.48
    
    
    $
    1.46Pro forma
    
    $
    1.44
    
    
    $
    1.44
 85




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Effect of Newly Issued, But Not Yet Effective Accounting Standards
 Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements
No. 133 and 140
 Accounting for Servicing of Financial
Assets-an amendment of FASB Statement No. 140.
 Fair Value Measurements
 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
 Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements
 86




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Reclassifications
 Stock Split
 87




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##### Table of Contents



2.
    
    LOANS RECEIVABLEThe Banks loan portfolio as of December 31 is summarized as follows:
 2006
    
    
    2005Real estate loans:Residential property  one to four units
    
    $
    106,675
    
    
    $
    115,925Residential property  more than four units
    
    
    79,896
    
    
    
    80,855Residential property  construction
    
    
    57,660
    
    
    
    50,590Nonresidential property  construction
    
    
    54,985
    
    
    
    20,293Commercial and other income  producing properties
    
    
    264,915
    
    
    
    253,208Loans for the acquisition and development of land
    
    
    54,738
    
    
    
    36,085Total real estate loans
    
    
    618,869
    
    
    
    556,956Commercial and industrial loans
    
    
    119,074
    
    
    
    96,566Consumer loans
    
    
    25,304
    
    
    
    26,653Loans collateralized by deposit accounts
    
    
    1,964
    
    
    
    1,070Consumer line-of-credit loans
    
    
    242
    
    
    
    201765,453
    
    
    
    681,446Net deferred loan fees
    
    
    (2,103
    )
    
    
    (2,498
    )Net (discount) premiums
    
    
    (403
    )
    
    
    (397
    )Allowance for loan losses
    
    
    (5,914
    )
    
    
    (5,661
    )Loans receivable, net
    
    $
    757,033
    
    
    $
    672,890
     88




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Balance, beginning of year
    
    $
    5,661
    
    
    $
    5,228
    
    
    $
    4,587Charge-offs
    
    
    (356
    )
    
    
    (2
    )
    
    
    (9
    )Recoveries
    
    
    44
    
    
    
    
    
    
    
    Provision for loan losses
    
    
    565
    
    
    
    435
    
    
    
    650Balance, end of year
    
    $
    5,914
    
    
    $
    5,661
    
    
    $
    5,228
 89




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##### Table of Contents



2006
    
    
    2005Impaired loans with a valuation allowance
    
    $
    98
    
    
    $
    1,549Impaired loans without a valuation allowance
    
    
    
    
    
    
    Total impaired loans
    
    
    98
    
    
    
    1,549Valuation allowance related to impaired loans
    
    $
    16
    
    
    $
    441
 2006
    
    2005
    
    2004Average recorded investment in impaired loans
    
    $
    824
    
    
    $
    853
    
    
    $
    440Interest income recognized on impaired loans
    
    
    
    
    
    
    
    
    
    
    14Interest income recognized on a cash basis
    
    
    
    
    
    
    
    
    
    
    14
   Unfunded Loan Commitments as of December 31,
(In Thousands)
 2006
    
    
    2005Commercial lines of credit
    
    $
    38,419
    
    
    $
    40,139Consumer lines of credit
    
    
    48,532
    
    
    
    46,423Undisbursed portion of loans in process
    
    
    83,855
    
    
    
    78,306Approved but, not funded mortgage loans
    
    
    7,463
    
    
    
    6,531Approved but, not funded commercial loans
    
    
    540
    
    
    
    8,292Approved but, not funded consumer loans
    
    
    300
    
    
    
    1,080Letters of credit
    
    
    4,387
    
    
    
    4,560Total commitments
    
    $
    183,496
    
    
    $
    185,331
  90




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##### Table of Contents



3.
    
    SECURITIESAll securities held do not have a single maturity date. The amortized cost and estimated fair
values of securities available for sale are summarized as follows:Securities Available for Sale:
 GrossUnrealized
    
    Gross UnrealizedAmortized Cost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2006Mortgage-backed securities  pass
throughs
    
    $
    98,244
    
    
    $
    215
    
    
    $
    (1,514
    )
    
    $
    96,945Collateralized mortgage obligations
    
    
    76,182
    
    
    
    130
    
    
    
    (517
    )
    
    
    75,795Commercial mortgage-backed
securities
    
    
    31,312
    
    
    
    
    
    
    
    (231
    )
    
    
    31,081Asset-backed securities
(underlying securities mortgages)
    
    
    102,815
    
    
    
    519
    
    
    
    (175
    )
    
    
    103,159Asset-backed securities
    
    
    2,747
    
    
    
    45
    
    
    
    (43
    )
    
    
    2,749$
    311,300
    
    
    $
    909
    
    
    $
    (2,480
    )
    
    $
    309,729
 GrossUnrealized
    
    Gross UnrealizedAmortized Cost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2005Mortgage-backed securities  pass
throughs
    
    $
    125,153
    
    
    $
    126
    
    
    $
    (2,439
    )
    
    $
    122,840Collateralized mortgage obligations
    
    
    80,470
    
    
    
    25
    
    
    
    (964
    )
    
    
    79,531Commercial mortgage-backed
securities
    
    
    40,647
    
    
    
    
    
    
    
    (468
    )
    
    
    40,179Asset-backed securities
(underlying securities mortgages)
    
    
    141,086
    
    
    
    659
    
    
    
    (181
    )
    
    
    141,564Asset-backed securities
    
    
    3,335
    
    
    
    52
    
    
    
    (149
    )
    
    
    3,238$
    390,691
    
    
    $
    862
    
    
    $
    (4,201
    )
    
    $
    387,352
  91




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Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2006
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed securities -
pass throughs
    
    $
    4,560
    
    
    $
    (10
    )
    
    $
    71,356
    
    
    $
    (1,504
    )
    
    $
    75,916
    
    
    $
    (1,514
    )Collateralized mortgage obligations
    
    
    23,705
    
    
    
    (102
    )
    
    
    11,664
    
    
    
    (415
    )
    
    
    35,369
    
    
    
    (517
    )Commercial mortgage-backed
securities
    
    
    0
    
    
    
    0
    
    
    
    31,081
    
    
    
    (231
    )
    
    
    31,081
    
    
    
    (231
    )Asset-backed securities -
(underlying securities mortgages)
    
    
    4,294
    
    
    
    (25
    )
    
    
    10,274
    
    
    
    (150
    )
    
    
    14,568
    
    
    
    (175
    )Asset-backed securities
    
    
    1,290
    
    
    
    (10
    )
    
    
    1,096
    
    
    
    (33
    )
    
    
    2,386
    
    
    
    (43
    )$
    33,849
    
    
    $
    (147
    )
    
    $
    125,471
    
    
    $
    (2,333
    )
    
    $
    159,320
    
    
    $
    (2,480
    )
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2005
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed securities -
pass throughs
    
    $
    55,827
    
    
    $
    (684
    )
    
    $
    55,881
    
    
    $
    (1,755
    )
    
    $
    111,708
    
    
    $
    (2,439
    )Collateralized mortgage obligations
    
    
    29,370
    
    
    
    (175
    )
    
    
    26,270
    
    
    
    (789
    )
    
    
    55,640
    
    
    
    (964
    )Commercial mortgage-backed
securities
    
    
    33,517
    
    
    
    (332
    )
    
    
    6,662
    
    
    
    (136
    )
    
    
    40,179
    
    
    
    (468
    )Asset-backed securities -
(underlying securities mortgages)
    
    
    25,237
    
    
    
    (136
    )
    
    
    2,923
    
    
    
    (45
    )
    
    
    28,160
    
    
    
    (181
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    2,433
    
    
    
    (149
    )
    
    
    2,433
    
    
    
    (149
    )$
    143,951
    
    
    $
    (1,327
    )
    
    $
    94,169
    
    
    $
    (2,874
    )
    
    $
    238,120
    
    
    $
    (4,201
    )
    92




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93




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairSecurities Held to Maturity:
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2006FNMA pass-through securities
    
    $
    69
    
    
    $
    2
    
    
    $
    
    
    
    $
    71
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2005FNMA pass-through securities
    
    $
    80
    
    
    $
    4
    
    
    $
    
    
    
    $
    84
 4.
    
    PREMISES AND EQUIPMENTPremises and equipment consist of the following at December 31:
 2006
    
    
    2005Land
    
    $
    4,873
    
    
    $
    1,811Buildings
    
    
    6,128
    
    
    
    4,091Leasehold improvements
    
    
    3,620
    
    
    
    3,088Furniture, fixtures and equipment
    
    
    6,789
    
    
    
    6,303Total
    
    
    21,410
    
    
    
    15,293Less: accumulated depreciation and amortization
    
    
    5,829
    
    
    
    5,017Premises and equipment, net
    
    $
    15,581
    
    
    $
    10,276
 Depreciation expense was $1,223, $1,273, and $1,041 for December 31, 2006, 2005, and
2004, respectively.
 94




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##### Table of Contents



5. DEPOSITS
  2006
    
    
    2005Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageAmount
    
    
    Interest Rate (1)
    
    
    Amount
    
    
    Interest Rate(1)Noninterest bearing:Noninterest bearing
    
    $
    12,022
    
    
    
    
    
    
    $
    14,590
    
    
    
    Commercial noninterest bearing
    
    
    43,070
    
    
    
    
    
    
    
    35,342
    
    
    
    Total noninterest bearing
    
    
    55,092
    
    
    
    
    
    
    
    49,932
    
    
    
    Interest bearing:Passbook
    
    
    17,597
    
    
    
    0.87
    %
    
    
    21,924
    
    
    
    0.88
    %NOW accounts
    
    
    35,082
    
    
    
    0.61
    %
    
    
    34,973
    
    
    
    0.40
    %Money Market
    
    
    60,602
    
    
    
    3.67
    %
    
    
    69,291
    
    
    
    2.85
    %Commercial Money Market
    
    
    8,100
    
    
    
    2.97
    %
    
    
    10,813
    
    
    
    1.55
    %Total interest bearing
    
    
    121,381
    
    
    
    2.33
    %
    
    
    137,001
    
    
    
    1.81
    %Total
    
    
    176,473
    
    
    
    1.60
    %
    
    
    186,933
    
    
    
    1.33
    %Certificates of deposits:$100,000 or greater
    
    
    308,652
    
    
    
    4.96
    %
    
    
    244,468
    
    
    
    3.68
    %Under $100,000
    
    
    247,632
    
    
    
    4.84
    %
    
    
    237,744
    
    
    
    3.63
    %Total certificates of deposits
    
    
    556,284
    
    
    
    
    
    
    
    482,212Total deposits
    
    $
    732,757
    
    
    
    4.11
    %
    
    $
    669,145
    
    
    
    3.00
    %
 
 (1)
    
    Weighted Average interest rate as of the end of the period.  $100,000 or
    
    
    Less thanDecember 31
    
    Greater
    
    
    $100,000
    
    
    Total2007
    
    $
    299,816
    
    
    $
    235,783
    
    
    $
    535,5992008
    
    
    3,741
    
    
    
    5,168
    
    
    
    8,9092009
    
    
    2,904
    
    
    
    4,152
    
    
    
    7,0562010
    
    
    1,512
    
    
    
    1,607
    
    
    
    3,1192011
    
    
    679
    
    
    
    922
    
    
    
    1,601$
    308,652
    
    
    $
    247,632
    
    
    $
    556,284
 95




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6. FEDERAL HOME LOAN BANK ADVANCES
    20062007 - overnight
    
    $
    238,0002010 - long-term
    
    
    19,000$
    257,000
 At or For the Year EndedDecember 31,2006
    
    2005
    
    2004(Dollars in Thousands)Overnight FHLB advances:Average balance outstanding during the
year
    
    $
    267,452
    
    
    $
    295,116
    
    
    $
    263,898Maximum amount outstanding at any
month-end during the period
    
    
    310,000
    
    
    
    339,050
    
    
    
    298,000Balance outstanding at end of period
    
    
    238,000
    
    
    
    300,000
    
    
    
    297,000Average interest rate during the period
    
    
    5.05
    %
    
    
    3.26
    %
    
    
    1.46
    %Average interest rate at end of period
    
    
    5.29
    %
    
    
    4.03
    %
    
    
    2.22
    %
 7. NOTE PAYABLE
   96




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8. SUBORDINATED DEBT
   9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
   97




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##### Table of Contents



10.
    
    INCOME TAXESThe provision for taxes on income consists of the following components for the years ended
December 31:
 2006
    
    
    2005
    
    
    2004Current tax expense:Federal
    
    $
    3,298
    
    
    $
    3,062
    
    
    $
    3,737State
    
    
    455
    
    
    
    1,095
    
    
    
    9183,753
    
    
    
    4,157
    
    
    
    4,655Deferred tax expense (benefit):Federal
    
    
    336
    
    
    
    937
    
    
    
    606State
    
    
    169
    
    
    
    86
    
    
    
    175505
    
    
    
    1,023
    
    
    
    781$
    4,258
    
    
    $
    5,180
    
    
    $
    5,436
 The actual tax rates differed from the statutory rates as follows for the years ended
December 31:
 2006
    
    
    2005
    
    
    2004Federal income taxes at statutory rates
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase resulting from:State tax, net of federal benefit
    
    
    3.2
    
    
    
    5.7
    
    
    
    5.2Earnings from bank owned life insurance
    
    
    (2.1
    )
    
    
    (1.6
    )
    
    
    Other, net
    
    
    (2.0
    )
    
    
    (0.8
    )
    
    
    (0.4
    )34.1
    %
    
    
    38.3
    %
    
    
    39.8
    %
 98




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##### Table of Contents



The following is a summary of the components of the net deferred tax asset at December
31:
 2006
    
    
    2005Deferred tax asset:Unrealized hedging loss on cash flow hedges
    
    $
    
    
    
    $
    74Unrealized loss on available for sale securities
    
    
    559
    
    
    
    1,321Non-qualified Stock Options
    
    
    242
    
    
    
    Allowance for loan losses
    
    
    2,544
    
    
    
    2,434State tax
    
    
    436
    
    
    
    405Deferred rent
    
    
    92
    
    
    
    91Gross deferred tax asset
    
    
    3,873
    
    
    
    4,325Deferred tax liabilities:Net loan fees/costs
    
    
    2,890
    
    
    
    2,166FHLB stock dividends
    
    
    1,459
    
    
    
    1,308Depreciation
    
    
    302
    
    
    
    492Unrealized hedging gain on cash flow hedges
    
    
    139
    
    
    
    Other
    
    
    181
    
    
    
    222Gross deferred tax liability
    
    
    4,971
    
    
    
    4,188Net deferred tax asset (liability)
    
    $
    (1,098
    )
    
    $
    137
 99




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##### Table of Contents



11.
    
    STOCKHOLDERS EQUITYRetained earnings are restricted to the extent that earnings deducted for tax purposes as
bad debt deductions are not available for payment of cash dividends or other distributions to
stockholders without payment of federal income taxes by the Company at the then-prevailing
corporate tax rates. At December 31, 2006, this restricted amount was $671.Qualified Stock Option Plan- The Company has a qualified stock option plan that provides for
the granting of stock options to key employees of the Bank. Options granted under the plan
are vested ratably over a four-year period. The option price is based on a determination of a
price that is not less than the fair value of the shares at the date of grant by the
Compensation Committee and ratified by the Board of Directors.During 1996, the Company granted 180,000 options with a stock price of $4.86 per share
and an expiration date of April 14, 2001. Such options were granted to Smith Breeden
Associates (SBA) for financial advisory services provided in connection with the Companys
acquisition of the Bank. The estimated value of such options as of the date granted was
considered as part of the purchase price of the Bank. During 2001, 129,056 of the options
were exercised and the balance of 50,944 options was extended to expire on June 30, 2003.During 2002, the maturity of the 50,944 options was extended two years from June 30, 2003
to June 30, 2005. A $124 thousand pre-tax charge to earnings was recorded in 2002, which was
equal to the change in the fair value of the underlying stock since the last extension,
applied to the number of options extended. Specifically, the $124 thousand pre-tax charge was
calculated by taking the difference between the fair values of the underlying stock at the
extension date (i.e., $9.00) and the fair value of the stock at the previous extension date
(i.e., $6.66) multiplied by 50,944. The offsetting entry was recorded to paid-in capital in
stockholders equity.2005 Equity Based Compensation Plan In May 2005, Company stockholders approved the 2005
Equity Based Compensation Plan (the Plan). The principal purpose of the 2005 Plan is to
promote the success of the Company by attracting, motivating, and retaining key employees,
including officers, and directors of the Company, through the grant of stock-based
compensation awards and incentives for high levels of individual performance and improved
financial performance of the Company. The availability of stock options and other equity
awards combined with the ability to condition vesting of those awards on performance based
criteria can provide the Company flexibility not currently found in the 1996 Stock Option
Plan. This flexibility will help the Company craft compensation practices that better align
managements interests with those of the stockholders.The Board also considered a number of other issues in adopting the 2005 Plan. The 1996
Stock Option Plan commenced in July 1996 and expired in 2005. A significant portion of the
total options authorized in the 1996 Stock Option Plan are granted and, therefore, are already
included in the Companys diluted share count and earnings per share calculations.
Accordingly, the Company expects additional dilution from unvested shares in the 1996 Stock
Option Plan will be minimal. The shares of Company stock subject to the 2005 Plan are limited
to ten percent (10%) of the number of shares issued and outstanding at any time to minimize
future dilution.The material aspects of the 2005 Plan are as follows:
 
    
    the 2005 Plan authorizes the granting of:
 Incentive Stock Options;
Non-Qualified Stock Options;
Stock Appreciation Rights (SARs);
Restricted Stock Awards;
Restricted Stock Units; and
Performance Share Cash Only Awards
 100




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##### Table of Contents




    
    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.
  Year Ended December 31,2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.98
    %
    
    
    4.32
    %
    
    
    4.07
    %Expected volatility
    
    
    52.79
    %
    
    
    49.80
    %
    
    
    36.37
    %Expected lives
    
    7 years
    
    9 years
    
    9 yearsContractual lives
    
    10 years
    
    10 years
    
    10 yearsDividend Yield
    
    
    3.11
    %
    
    
    2.92
    %
    
    
    2.18
    %
  2006
    
    2005
    
    2004Intrinsic value of options exercised
    
    $
    794
    
    
    $
    1,195
    
    
    $
    747Cash received from option exercises
    
    
    429
    
    
    
    587
    
    
    
    515Tax benefit realized from option exercises
    
    
    397
    
    
    
    250
    
    
    
    Weighted average fair value of options
granted
    
    
    7.08
    
    
    
    9.01
    
    
    
    5.93
 101




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##### Table of Contents



($ in Thousands Except Per Share Information)
    
    2006Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Life
    
    
    ValueIncentive stock options:Outstanding beginning of year
    
    
    620,440
    
    
    $
    9.55Granted
    
    
    102,500
    
    
    $
    16.80Forfeited/Expired unexercised
    
    
    (2,050
    )
    
    $
    16.89Options exercised
    
    
    (75,550
    )
    
    $
    5.68Outstanding, end of the period
    
    
    645,340
    
    
    $
    11.18
    
    
    
    5.4
    
    
    $
    4,002Vested or expected to vest at 12/31/06
    
    
    639,102
    
    
    $
    11.14
    
    
    
    5.4
    
    
    $
    3,992Exercisable, end of the period
    
    
    437,392
    
    
    $
    8.90
    
    
    
    4.1
    
    
    $
    3,695
  12.
    
    REGULATORY CAPITAL REQUIREMENTS
    102




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103




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##### Table of Contents



REGULATORY CAPITAL
FINANCIAL STATEMENT FOOTNOTE
  To Be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Actions ProvisionsAmount
    
    Ratio
    
    Amount
    
    
    
    
    
    Ratio
    
    Amount
    
    
    
    
    
    RatioAs of December 31, 2006:Total Capital(to risk weighted assets)
    
    $
    90,921
    
    
    
    10.78
    %
    
    $
    67,481
    
    
    
    >
    
    
    
    8.00
    %
    
    $
    84,351
    
    
    
    >
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    85,008
    
    
    
    7.41
    %
    
    $
    45,862
    
    
    
    >
    
    
    
    4.00
    %
    
    $
    57,328
    
    
    
    >
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    85,008
    
    
    
    7.41
    %
    
    $
    17,198
    
    
    
    >
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    85,008
    
    
    
    10.08
    %
    
    $
    33,741
    
    
    
    
    
    
    
    4.00
    %
    
    
    50,611
    
    
    
    >
    
    
    
    6.00
    %As of December 31, 2005:Total Capital(to risk weighted assets)
    
    $
    82,594
    
    
    
    10.69
    %
    
    $
    61,784
    
    
    
    >
    
    
    
    8.00
    %
    
    $
    77,230
    
    
    
    >
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    76,933
    
    
    
    6.78
    %
    
    $
    45,361
    
    
    
    >
    
    
    
    4.00
    %
    
    $
    56,702
    
    
    
    >
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    76,933
    
    
    
    6.78
    %
    
    $
    17,010
    
    
    
    >
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    76,933
    
    
    
    9.96
    %
    
    $
    30,892
    
    
    
    
    
    
    
    4.00
    %
    
    $
    46,338
    
    
    
    >
    
    
    
    6.00
    %
 104




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##### Table of Contents



13.
    
    EARNINGS PER SHAREThe following tables represent the calculations of earnings per share (EPS) for the periods
presented.
 Year Ended December 31, 2006Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    8,228
    
    
    
    5,441,075
    
    
    $
    1.51Effect of dilutive stock options
    
    
    
    
    
    
    131,589
    
    
    
    (0.03
    )Diluted EPS
    
    $
    8,228
    
    
    
    5,572,664
    
    
    $
    1.48
 Year Ended December 31, 2005Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    8,336
    
    
    
    5,347,757
    
    
    $
    1.56Effect of dilutive stock options
    
    
    
    
    
    
    272,799
    
    
    
    (0.08
    )Diluted EPS
    
    $
    8,336
    
    
    
    5,620,556
    
    
    $
    1.48
 Year Ended December 31, 2004Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    8,209
    
    
    
    5,256,030
    
    
    $
    1.56Effect of dilutive stock options
    
    
    
    
    
    
    347,650
    
    
    
    (0.10
    )Diluted EPS
    
    $
    8,209
    
    
    
    5,603,680
    
    
    $
    1.46
  14.
    
    COMMITMENTS AND CONTINGENCIESAggregate minimum lease commitments under long-term operating leases as of December 31, 2006
are as follows:
 2007
    
    $
    1,2442008
    
    
    1,0992009
    
    
    9762010
    
    
    6562011
    
    
    3072012 and thereafter
    
    
    178$
    4,460
   105




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##### Table of Contents



15.
    
    TRADING ACCOUNT ASSETS
 Derivative Instruments Not Receiving Hedge Treatment
 Interest rate swaps
 106




---



##### Table of Contents



Contract or
    
    Estimated
    
    Weighted AverageNotional
    
    Fair Value
    
    Interest RateAmount
    
    Asset
    
    Liability
    
    Payable
    
    Receivable2005Total return swaps  receive total return
CMBS investment grade total return,
    
    $
    50,000
    
    
    $
    116
    
    
    
    
    
    
    Bank receives the
spread on Lehman Brothers
AAA CMBS Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total return
on CMBS investment grade total return
    
    $
    25,000
    
    
    $
    76
    
    
    
    
    
    
    Bank receives the
spread on Banc of America
BAS CMBS AAA Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total return
on CMBS investment grade total return
    
    $
    9,000
    
    
    $
    6
    
    
    
    
    
    
    Bank receives the
spread on Banc of America
BAS CMBS AA Index Plus a
spread and receives or
pays the market value
change of index.Total return swaps  receive total return
on CMBS investment grade total return
    
    $
    15,000
    
    
    
    
    
    
    $
    (58
    )
    
    Bank receives the
spread on Banc of America
BAS CMBS BBB Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total return
on one month LIBOR-based ABS securities
    
    $
    30,000
    
    
    
    
    
    
    $
    (12
    )
    
    Bank receives the
spread on five specific
AA floating ABS
securities plus a spread
of 3 basis points and
receives or pays the
market value change at
maturity.
 107




---



##### Table of Contents



IncomeRealized
    
    
    Unrealized
    
    
    fromGains
    
    
    Gains
    
    
    Trading(Losses)
    
    
    (Losses)
    
    
    AssetsDecember 31, 2006Interest rate contracts:Swaps
    
    $
    1,074
    
    
    $
    (127
    )
    
    $
    947MBS and other trading assets
    
    
    63
    
    
    
    14
    
    
    
    77Total trading portfolio
    
    $
    1,137
    
    
    $
    (113
    )
    
    $
    1,024December 31, 2005Interest rate contracts:Swaps
    
    $
    24
    
    
    $
    50
    
    
    $
    74MBS and other trading assets
    
    
    4
    
    
    
    (75
    )
    
    
    (71
    )Total trading portfolio
    
    $
    28
    
    
    $
    (25
    )
    
    $
    3December 31, 2004Interest rate contracts:Swaps
    
    $
    674
    
    
    $
    (71
    )
    
    $
    601MBS and other trading assets
    
    
    1
    
    
    
    (31
    )
    
    
    (30
    )Total trading portfolio
    
    $
    675
    
    
    $
    (102
    )
    
    $
    571
 108




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##### Table of Contents



The following table shows the Companys trading securities included in trading account
assets as of December 31:Securities Held for Trading:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2006Mortgage-backed securities and other
    
    $
    235
    
    
    $
    2
    
    
    $
    
    
    
    $
    237Mutual funds
    
    
    585
    
    
    
    20
    
    
    
    (5
    )
    
    
    600Trading assets
    
    $
    820
    
    
    $
    22
    
    
    $
    (5
    )
    
    $
    837
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2005Mortgage-backed securities and other
    
    $
    324
    
    
    $
    1
    
    
    $
    (2
    )
    
    $
    323Mutual funds
    
    
    522
    
    
    
    2
    
    
    
    
    
    
    
    524CMBS total return swaps
    
    
    
    
    
    
    198
    
    
    
    (70
    )
    
    
    128Trading assets
    
    $
    846
    
    
    $
    201
    
    
    $
    (72
    )
    
    $
    975
 16.
    
    DERIVATIVES HELD FOR ASSET AND LIABILITY MANAGEMENTAt December 31, 2006, the swaps listed below are hedging the interest rate risk of cash
flows associated with deposits and borrowings. These swaps qualify as cash flow hedges.
During 2006, 2005 and 2004, the ineffective portion of the change in fair value of the cash
flow hedges was ($6) thousand, ($6) thousand, and $155 thousand, respectively. The fair
values for the cash flow swaps in a gain position are reported in Other assets, those in a
loss position are reported in Other liabilities. No significant cash flow hedges were
discontinued during fiscal years 2006, 2005 or 2004.
 Contract or
    
    
    
    
    
    Weighted-AverageNotional
    
    Estimated
    
    Interest RateAmount
    
    Fair Value
    
    Receivable
    
    PayableDecember 31, 2006 -Interest rate swaps  pay fixed
receive 3-month LIBOR
    
    $
    164,000
    
    
    $
    587
    
    
    
    5.36
    %
    
    
    4.73
    %December 31, 2005 -Interest rate swaps  pay fixed
receive 3-month LIBOR
    
    $
    152,000
    
    
    $
    33
    
    
    
    4.39
    %
    
    
    4.42
    %
 109




---



##### Table of Contents



Maturities
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    52,000
    
    
    $
    4,000
    
    
    $
    60,000
    
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    28,000Weighted-average
payable rate
    
    
    3.80
    %
    
    
    3.78
    %
    
    
    5.25
    %
    
    
    6.29
    %
    
    
    4.90
    %
    
    
    4.84
    %Weighted-average
receivable rate
    
    
    5.36
    %
    
    
    5.37
    %
    
    
    5.36
    %
    
    
    5.36
    %
    
    
    5.38
    %
    
    
    5.36
    %
   17.
    
    FAIR VALUES OF FINANCIAL INSTRUMENTS
 Disclosures about Fair Value of Financial Instruments
 110




---



##### Table of Contents



2006
    
    2005Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    21,178
    
    
    $
    21,178
    
    
    $
    19,312
    
    
    $
    19,312Trading account assets
    
    
    837
    
    
    
    837
    
    
    
    975
    
    
    
    975Securities, available for sale
    
    
    309,729
    
    
    
    309,729
    
    
    
    387,352
    
    
    
    387,352Securities, held to maturity
    
    
    69
    
    
    
    71
    
    
    
    80
    
    
    
    84Loans receivable, net
    
    
    757,033
    
    
    
    760,913
    
    
    
    672,890
    
    
    
    675,326FHLB stock
    
    
    14,615
    
    
    
    14,615
    
    
    
    16,364
    
    
    
    16,364Due from broker
    
    
    142
    
    
    
    142
    
    
    
    
    
    
    
    Accrued interest receivable
    
    
    5,315
    
    
    
    5,315
    
    
    
    4,463
    
    
    
    4,463Liabilities:Demand deposits
    
    
    176,473
    
    
    
    176,473
    
    
    
    186,933
    
    
    
    186,933Certificates of deposits
    
    
    556,284
    
    
    
    554,971
    
    
    
    482,212
    
    
    
    479,443FHLB advances
    
    
    257,000
    
    
    
    256,551
    
    
    
    319,000
    
    
    
    318,359Securities sold under
repurchase agreements
    
    
    65,141
    
    
    
    65,027
    
    
    
    59,013
    
    
    
    58,894Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Due to broker
    
    
    
    
    
    
    
    
    
    
    2,474
    
    
    
    2,474Accrued interest payable
    
    
    1,063
    
    
    
    1,063
    
    
    
    914
    
    
    
    914Hedging Instruments -Interest rate swaps
    
    
    587
    
    
    
    587
    
    
    
    33
    
    
    
    33
  Cash and Cash Equivalents
 Trading Account Assets
 Securities
 Loans
 FHLB Stock
 111




---



##### Table of Contents



Accrued Interest Receivable 
 Deposits
 FHLB Advances
 Securities Sold under Repurchase Agreements
 Subordinated Debt
 Due to/Due from Broker
 Hedging instruments
 Commitments to Extend Credit, and Standby and Commercial Letters of Credit
 Accrued Interest Payable
 18.
    
    RELATED-PARTY TRANSACTIONSThe Bank has contracted with Smith Breeden Associates (SBA) to provide investment
advisory services and interest rate risk analysis. A principal of SBA is a director for the
Company and the Bank. Several principals and employees of SBA are stockholders of the
Company. The amount of consulting
expense relating to SBA for the years ended December 31, 2006, 2005 and 2004 was
$405,000, $425,000 and $412,000, respectively.
 112




---



##### Table of Contents



The Bank grants loans to principal officers and directors and their affiliates. Other
than draws on existing lines of credit, there were no new loans granted in 2005 and 2006.The following table is a roll-forward of the related party loan activity and outstanding
balances on previously granted loans as of December 31, 2006 and 2005.
 Amounts in thousands
    
    2006
    
    
    2005Beginning balance
    
    $
    4,929
    
    
    $
    5,382Additions
    
    
    9
    
    
    
    Repayments
    
    
    (113
    )
    
    
    (453
    )Ending balance
    
    $
    4,825
    
    
    $
    4,929
 19.
    
    EMPLOYEE BENEFIT PLANThe Company sponsors a defined contribution plan for the benefit of its employees. The
Companys contributions to the plan are determined annually by the Board of Directors in
accordance with plan requirements. For tax purposes, eligible participants may contribute up
to a maximum of 15% of their compensation, not to exceed the dollar limit imposed by the
Internal Revenue Service. The expense associated with the employee benefit plan is included
in salary and employee benefits in the consolidated statements of earnings. For the plan
years ended December 31, 2006, 2005 and 2004, the Company contributed $345,000, $392,000 and
$473,000, respectively.
 113




---



##### Table of Contents



20.
    
    PARENT COMPANY ONLY FINANCIAL INFORMATIONCondensed Statements of Financial Condition
 December 31,2006
    
    
    2005ASSETSCash and cash equivalents
    
    $
    1,711
    
    
    $
    2,743Trading account assets
    
    
    175
    
    
    
    167Investment in Bank
    
    
    90,792
    
    
    
    81,614Investment in capital trusts
    
    
    891
    
    
    
    832Other assets
    
    
    429
    
    
    
    672TOTAL
    
    $
    93,998
    
    
    $
    86,028LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Subordinated debt
    
    $
    25,774
    
    
    $
    25,774Accounts payable and other liabilities
    
    
    526
    
    
    
    680Total liabilities
    
    
    26,300
    
    
    
    26,454Stockholders Equity:Preferred stock, $.01 par value; 1,200,000 shares authorized:none issued and outstandingCommon stock, $.01 par value; 10,800,000 shares authorized;
5,460,393 shares issued and outstanding as of December 31,
2006 and 5,384,843 shares as of December 31, 2005
    
    
    55
    
    
    
    54Additional paid-in capital
    
    
    33,332
    
    
    
    32,059Retained earnings
    
    
    34,964
    
    
    
    29,458Accumulated other comprehensive loss, net of tax
    
    
    (653
    )
    
    
    (1,997
    )Total stockholders equity
    
    
    67,698
    
    
    
    59,574TOTAL
    
    $
    93,998
    
    
    $
    86,028
 114




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##### Table of Contents



Condensed Statements of Earnings
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Interest income
    
    $
    5
    
    
    $
    5
    
    
    $
    23Interest expense
    
    
    (2,020
    )
    
    
    (1,559
    )
    
    
    (822
    )Net interest expense
    
    
    (2,015
    )
    
    
    (1,554
    )
    
    
    (799
    )Other income (loss)
    
    
    39
    
    
    
    39
    
    
    
    (15
    )Other expense
    
    
    (1,089
    )
    
    
    (1,018
    )
    
    
    (1,002
    )Loss before income taxes and equity in subsidiaries
    
    
    (3,065
    )
    
    
    (2,533
    )
    
    
    (1,816
    )Income tax benefit
    
    
    1,192
    
    
    
    994
    
    
    
    740Loss before equity in subsidiary
    
    
    (1,873
    )
    
    
    (1,539
    )
    
    
    (1,076
    )Dividends from subsidiary
    
    
    3,050
    
    
    
    2,900
    
    
    
    4,000Equity in net earnings of subsidiary
    
    
    7,051
    
    
    
    6,975
    
    
    
    5,285Net income
    
    $
    8,228
    
    
    $
    8,336
    
    
    $
    8,209
 115




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##### Table of Contents



Condensed Statements of Cash Flows
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash Flows from Operating Activities:Net income
    
    $
    8,228
    
    
    $
    8,336
    
    
    $
    8,209Adjustments:Equity in net undistributed earnings of subsidiary
    
    
    (7,051
    )
    
    
    (9,875
    )
    
    
    (9,299
    )(Increase) decrease in unrealized gain in trading assets
    
    
    (8
    )
    
    
    (4
    )
    
    
    (17
    )Amortization and depreciation
    
    
    22
    
    
    
    33
    
    
    
    (3
    )(Decrease) in income taxes payable receivable
    
    
    (267
    )Decrease in other assets
    
    
    221
    
    
    
    336
    
    
    
    11(Decrease) increase in accounts payable and
other liabilities
    
    
    115
    
    
    
    117
    
    
    
    (454
    )Net cash used in operating activities
    
    
    (1,260
    )
    
    
    (1,057
    )
    
    
    (1,553
    )Cash Flows from Investing Activities:Net decrease in investment securities
    
    
    
    
    
    
    
    
    
    
    714Investment in capital trusts
    
    
    
    
    
    
    
    
    
    
    (303
    )Purchase of furniture, fixtures and equipment
    
    
    
    
    
    
    
    
    
    
    (99
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    312Cash Flows from Financing Activities:Net proceeds from exercise of stock options
    
    
    430
    
    
    
    835
    
    
    
    516Cash contribution to subsidiary
    
    
    
    
    
    
    
    
    
    
    (7,400
    )Cash dividends received from Bank
    
    
    
    
    
    
    2,900
    
    
    
    4,000Cash dividends paid
    
    
    (2,722
    )
    
    
    (2,515
    )
    
    
    (4,645
    )Increase in subordinated debt
    
    
    
    
    
    
    
    
    
    
    10,310Net cash provided by financing activities
    
    
    (2,292
    )
    
    
    1,220
    
    
    
    2,781Net (decrease) increase in cash and cash equivalents
    
    
    (1,032
    )
    
    
    163
    
    
    
    1,540Cash and cash equivalents, beginning of year
    
    
    2,743
    
    
    
    2,580
    
    
    
    1,040Cash and cash equivalents, end of year
    
    $
    1,711
    
    
    $
    2,743
    
    
    $
    2,580
 116




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##### Table of Contents



21.
    
    QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 Quarters EndedDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2006Interest income
    
    $
    19,250
    
    
    $
    18,978
    
    
    $
    18,207
    
    
    $
    17,664Interest expense
    
    
    11,700
    
    
    
    11,275
    
    
    
    10,510
    
    
    
    9,858Net interest income
    
    
    7,550
    
    
    
    7,703
    
    
    
    7,697
    
    
    
    7,806Provision for loan losses
    
    
    75
    
    
    
    200
    
    
    
    150
    
    
    
    140Net interest income after provision for
loan loss
    
    
    7,475
    
    
    
    7,503
    
    
    
    7,547
    
    
    
    7,666Noninterest income
    
    
    1,078
    
    
    
    1,055
    
    
    
    1,162
    
    
    
    1,166Noninterest expense
    
    
    5,674
    
    
    
    5,543
    
    
    
    5,560
    
    
    
    5,392Income before provision for income taxes
    
    
    2,879
    
    
    
    3,015
    
    
    
    3,149
    
    
    
    3,440Provision for income taxes
    
    
    926
    
    
    
    913
    
    
    
    1,074
    
    
    
    1,342Net income
    
    $
    1,953
    
    
    $
    2,102
    
    
    $
    2,075
    
    
    $
    2,098Basic earnings per share
    
    $
    0.36
    
    
    $
    0.39
    
    
    $
    0.38
    
    
    $
    0.39Diluted earnings per share
    
    $
    0.35
    
    
    $
    0.38
    
    
    $
    0.37
    
    
    $
    0.382005Interest income
    
    $
    16,738
    
    
    $
    15,847
    
    
    $
    15,163
    
    
    $
    14,308Interest expense
    
    
    9,186
    
    
    
    8,285
    
    
    
    7,680
    
    
    
    6,747Net interest income
    
    
    7,552
    
    
    
    7,562
    
    
    
    7,483
    
    
    
    7,561Provision for loan losses
    
    
    85
    
    
    
    
    
    
    
    200
    
    
    
    150Net interest income after provision for
loan loss
    
    
    7,467
    
    
    
    7,562
    
    
    
    7,283
    
    
    
    7,411Noninterest income
    
    
    1,019
    
    
    
    1,241
    
    
    
    1,046
    
    
    
    1,563Noninterest expense
    
    
    5,349
    
    
    
    5,379
    
    
    
    5,138
    
    
    
    5,210Income before provision for income taxes
    
    
    3,137
    
    
    
    3,424
    
    
    
    3,191
    
    
    
    3,764Provision for income taxes
    
    
    1,085
    
    
    
    1,326
    
    
    
    1,240
    
    
    
    1,529Net income
    
    $
    2,052
    
    
    $
    2,098
    
    
    $
    1,951
    
    
    $
    2,235Basic earnings per share
    
    $
    0.38
    
    
    $
    0.39
    
    
    $
    0.36
    
    
    $
    0.42Diluted earnings per share
    
    $
    0.36
    
    
    $
    0.37
    
    
    $
    0.35
    
    
    $
    0.40
 117




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 . Item 9a. Controls and Procedures
   
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
    
 Item 11. Executive Compensation.
  118




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##### Table of Contents



Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
    Number of securitiesNumber of
    
    
    
    
    
    
    remaining available forsecurities to be
    
    
    
    
    
    
    future issuance underissued upon exercise
    
    
    Weighted-average
    
    
    equity compensationof outstanding
    
    
    exercise price of
    
    
    plans (excludingoptions, warrants
    
    
    outstanding options,
    
    
    securities reflected inand rights
    
    
    warrants and rights
    
    
    column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    645,340
    
    
    $
    11.18
    
    
    
    441,539Total
    
    
    645,340
    
    
    $
    11.18
    
    
    
    441,539
 
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountant Fees and Services
  119




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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)
 120




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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 Chizek and Company LLP23.2
    
    Consent of Deloitte & Touche LLP31.1
    
    Section 302 Certification by Chief Executive Officer filed herewith.31.2
    
    Section 302 Certification by Chief Financial Officer filed herewith.32
    
    Section 906 Certification by Chief Executive Officer and Chief Financial
Officer furnished herewith.
 
 (1)
    
    Incorporated by reference to the Registrants Form S-1 (File No. 333-99031)
filed with the Securities and Exchange Commission (the SEC) on August 30, 2002, as
amended.(2)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter ending
September 30, 2003 filed with the SEC on November 11, 2003.(3)
    
    Previously filed. 121




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##### Table of Contents



SIGNATURES
  HARRINGTON WEST FINANCIAL GROUP, INC.March 23, 2007
    By:
    /s/ Craig J. CernyCraig J. CernyChairman of the Board
and Chief Executive Officer
(Principal Executive Officer) March 23, 2007
    By:
    /s/ William W. Phillips, jr.William W. Phillips, Jr.President, Chief Operating Officer
(Principal Executive Officer) March 23, 2007
    By:
    /s/ Kerry SteeleKerry SteeleSr. Vice-President, Chief Financial Officer
(Principle Financial and Accounting Officer)  NAME
    
    TITLE
    
    DATE/s/ Craig J. Cerny

Craig J. Cerny
    
    Chairman of the Board and Chief Executive Officer
    
    March 23, 2007/s/ William W. Phillips

William W. Phillips, Jr.
    
    Director, President, and Chief Operating Officer
    
    March 23, 2007/s/ John J. McConnell

John J. McConnell
    
    Director
    
    March 23, 2007/s/ Paul O. Halme

Paul O. Halme
    
    Director
    
    March 23, 2007/s/ William D. Ross

William D. Ross
    
    Director
    
    March 23, 2007/s/ Tim Hatlestad

Tim Hatlestad
    
    Director
    
    March 23, 2007
 122