##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
File Number: 000-50066
 HARRINGTON WEST FINANCIAL GROUP, INC.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    48-1175170
(I.R.S. Employer Identification No.)
 
 
 
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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##### 



HARRINGTON WEST FINANCIAL GROUP, INC.
 TABLE OF CONTENTS
 PagePart I    Financial InformationItem 1.Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Financial Condition as of
March 31, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Income (Loss)
for the Three Months Ended March 31, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Stockholders Equity and Comprehensive
Income (Loss) for the Three Months Ended March 31, 2009
and Year Ended December 31, 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4T.Controls and Procedures
    
    
    37Part II  Other InformationItem 1.Legal Proceedings
    
    
    38Item 1A.Risk Factors
    
    
    38Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3.Defaults upon Senior Securities
    
    
    38Item 4.Submission of Matters to a Vote of Security Holders
    
    
    38Item 5.Other Information
    
    
    38Item 6.Exhibits
    
    
    38Signatures
    
    
    39EX-31.1EX-31.2EX-31.3EX-32
  - 2 -




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##### Table of Contents



PART 1-FINANCIAL INFORMATION
 
 Item 1: Condensed Consolidated Financial Statements
 
 HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)  (Dollars in thousands, except per share data)
 March 31,
    
    December 31,2009
    
    2008Assets:Cash and cash equivalents
    
    $
    15,364
    
    
    $
    27,040Trading account assets
    
    
    772
    
    
    
    744Securities, available-for-sale
    
    
    259,015
    
    
    
    273,678Securities held to maturity (fair value of $38 at March 31, 2009 and $38 at December 31, 2008)
    
    
    35
    
    
    
    37Loans held for sale
    
    
    5,882
    
    
    
    Loans receivable, net of allowance for loan losses of $11,409 at
March 31, 2009 and $11,449 at December 31, 2008
    
    
    782,389
    
    
    
    798,325Accrued interest receivable
    
    
    4,130
    
    
    
    3,897Real estate owned
    
    
    11,999
    
    
    
    7,449Real estate sold on contract
    
    
    874
    
    
    
    Premises, equipment and other long-term assets
    
    
    17,556
    
    
    
    17,732Prepaid expenses and other assets
    
    
    2,836
    
    
    
    3,254Investment in FHLB stock, at cost
    
    
    11,501
    
    
    
    11,501Income taxes receivable
    
    
    2,250
    
    
    
    1,468Cash surrender value of life insurance
    
    
    23,790
    
    
    
    23,712Deferred tax asset
    
    
    22,894
    
    
    
    20,748Goodwill
    
    
    5,496
    
    
    
    5,496Other intangible assets
    
    
    518
    
    
    
    554Total assets
    
    $
    1,167,301
    
    
    $
    1,195,635Liabilities:Deposits:Interest-bearing deposits
    
    $
    879,702
    
    
    $
    853,523Non-interest-bearing demand deposits
    
    
    41,097
    
    
    
    46,070Total Deposits
    
    
    920,799
    
    
    
    899,593FHLB advances
    
    
    155,000
    
    
    
    190,000Securities sold under repurchase agreements
    
    
    19,403
    
    
    
    19,499Subordinated debt
    
    
    25,774
    
    
    
    25,774Accrued interest payable and other liabilities
    
    
    4,114
    
    
    
    14,331Total liabilities
    
    
    1,125,090
    
    
    
    1,149,197Shareholders equityPreferred stock, $ .01 par value;8% non-cumulative, 5,000,000 shares authorized; 142,999 shares issued and
outstanding as of March 31, 2009 with no shares issued and outstanding December 31, 2008 Liquidation
preference of $3.6 million at March 31, 2009 and December 31, 2008
    
    
    2
    
    
    
    2Common stock, $.01 par value; 15,000,000 shares authorized; 7,020,093 shares issued and outstanding as of
March 31, 2009 and 6,770,093 shares issued and outstanding December 31, 2008
    
    
    74
    
    
    
    72Additional paid-in capital  Common
    
    
    46,015
    
    
    
    45,437Additional paid-in capital  Preferred
    
    
    4,649
    
    
    
    4,649Stock subscriptions
    
    
    (3,857
    )
    
    
    (3,857
    )Retained earnings
    
    
    22,191
    
    
    
    23,356Accumulated other comprehensive loss
    
    
    (26,863
    )
    
    
    (23,221
    )Total shareholders equity
    
    
    42,211
    
    
    
    46,438Total liabilities and shareholders equity
    
    $
    1,167,301
    
    
    $
    1,195,635
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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)  (Dollars in thousands, except per share data)
 Quarter endedMarch 31,2009
    
    
    2008Interest income:Loans
    
    $
    12,201
    
    
    $
    14,200Securities
    
    
    2,270
    
    
    
    5,365Total interest income
    
    
    14,471
    
    
    
    19,565Interest expense:Deposits
    
    
    6,392
    
    
    
    8,482Interest on FHLB advances, repos & other debt
    
    
    2,100
    
    
    
    3,368Total interest expense
    
    
    8,492
    
    
    
    11,850Net interest income
    
    
    5,979
    
    
    
    7,715Provision for loan losses
    
    
    1,750
    
    
    
    500Net interest income after provision for loan losses
    
    
    4,229
    
    
    
    7,215Non-interest income:Other-than-temporary lossTotal impairment losses
    
    
    (3,886
    )
    
    
    (70
    )Loss recognized in other comprehensive income
    
    
    (1,748
    )
    
    
    Net impairment losses recognized in earnings
    
    
    (2,138
    )
    
    
    (70
    )Gain on sale of available for sale securities
    
    
    6
    
    
    
    1,402Gain (loss) from trading assets
    
    
    3
    
    
    
    (8,670
    )Loss on write-down of real estate owned
    
    
    1
    
    
    
    Gain (loss) on sale of other assets
    
    
    
    
    
    
    1Increase in cash surrender value of life insurance
    
    
    84
    
    
    
    193Banking fee and other income
    
    
    824
    
    
    
    840Total non-interest income
    
    
    (1,220
    )
    
    
    (6,304
    )Non-interest expense:Salaries and employee benefits
    
    
    3,343
    
    
    
    3,536Premises and equipment
    
    
    1,006
    
    
    
    993Insurance premiums
    
    
    273
    
    
    
    212Marketing
    
    
    75
    
    
    
    96Computer services
    
    
    251
    
    
    
    256Professional fees
    
    
    203
    
    
    
    135Office expenses and supplies
    
    
    177
    
    
    
    209Other
    
    
    1,014
    
    
    
    673Total non-interest expense
    
    
    6,342
    
    
    
    6,110Income (loss) before income taxes
    
    
    (3,333
    )
    
    
    (5,199
    )Provision for income tax expense (benefit)
    
    
    (1,251
    )
    
    
    (1,953
    )Net income (loss)
    
    
    (2,082
    )
    
    
    (3,246
    )Dividend on preferred stock
    
    
    0
    
    
    
    Income (loss) available to common shareholders
    
    $
    (2,082
    )
    
    $
    (3,246
    )Basic earnings/(loss) per share
    
    $
    (0.31
    )
    
    $
    (0.58
    )Diluted earnings/(loss) per share
    
    $
    (0.31
    )
    
    $
    (0.58
    )Basic weighted-average shares outstanding
    
    
    6,775,649
    
    
    
    5,590,236Diluted weighted-average shares outstanding
    
    
    6,775,649
    
    
    
    5,590,236
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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands, except share and per share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Subscriptions
    
    
    Earnings
    
    
    Loss
    
    
    Loss
    
    
    EquityBALANCE, DECEMBER 31, 2007
    
    
    
    
    
    
    
    
    
    
    5,554,003
    
    
    
    56
    
    
    
    34,424
    
    
    
    
    
    
    
    35,368
    
    
    
    
    
    
    
    (14,806
    )
    
    
    55,042Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,810
    )
    
    $
    (10,810
    )
    
    
    
    
    
    
    (10,810
    )Other comprehensive loss, net of taxUnrealized losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,350
    )
    
    
    (5,350
    )
    
    
    (5,350
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,065
    )
    
    
    (3,065
    )
    
    
    (3,065
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (19,225
    )Stock options exercised
including tax benefit of $25
    
    
    
    
    
    
    
    
    
    
    27,240
    
    
    
    
    
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233Common shares issued in
private offering at $7.75
    
    
    
    
    
    
    
    
    
    
    550,000
    
    
    
    5
    
    
    
    4,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,262Common shares issued in
private offering at $6.25
    
    
    
    
    
    
    
    
    
    
    638,850
    
    
    
    11
    
    
    
    6,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,164Preferred shares issued in
private offering at $25.00
    
    
    142,999
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,651Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Stock subscriptions unissued:Preferred stock 54,001
shares at $25.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )Common stock 401,150
shares at $6.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,507
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,507
    )Dividends on preferred
stock at 8% per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Dividends on common
stock at $.195 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,141
    )
    
    
    
    
    
    
    
    
    
    
    (1,141
    )BALANCE, DECEMBER 31, 2008
    
    
    142,999
    
    
    $
    2
    
    
    
    6,770,093
    
    
    $
    72
    
    
    $
    50,086
    
    
    $
    (3,857
    )
    
    $
    23,356
    
    
    
    
    
    
    $
    (23,221
    )
    
    $
    46,438Comprehensive lossCumulative effect of change in accounting
principle, adoption of FSP FAS 115-2 and
124-2 (net of tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    917
    
    
    
    
    
    
    
    (917
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,082
    )
    
    $
    (2,082
    )
    
    
    
    
    
    
    (2,082
    )Other comprehensive loss, net of taxChange in unrealized gains (losses) on securities
available for sale, net of reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,394
    )
    
    
    (1,394
    )
    
    
    (1,394
    )Change in unrealized gains (losses) on securities
available for sale for which a portion of an other-
than-temporary impairment has been recognized in
earnings, net of reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,093
    )
    
    
    (1,093
    )
    
    
    (1,093
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )
    
    
    (238
    )
    
    
    (238
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,807
    )Stock options exercised
including tax benefit of $25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common shares issued in
private offering at $2.00 per share
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    2
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    800BALANCE, MARCH 31, 2009
    
    
    142,999
    
    
    $
    2
    
    
    
    7,020,093
    
    
    $
    74
    
    
    $
    50,664
    
    
    $
    (3,857
    )
    
    $
    22,191
    
    
    
    
    
    
    $
    (26,863
    )
    
    $
    42,211
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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  (Dollars in thousands)
 Three Months EndedMarch 312009
    
    
    2008Cash flows from operating activities:Net (loss) income
    
    $
    (2,082
    )
    
    $
    (3,246
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Accretion of deferred loan fees and costs
    
    
    (1,231
    )
    
    
    (173
    )Depreciation and amortization
    
    
    339
    
    
    
    358Amortization and accretion of premiums and discounts on loans
receivable and securities
    
    
    (123
    )
    
    
    (242
    )Deferred income taxes
    
    
    (656
    )
    
    
    (7,949
    )Provision for loan losses
    
    
    1,750
    
    
    
    500Activity in trading account assets
    
    
    (25
    )
    
    
    (1,902
    )Loss (gain) on sale of trading securities
    
    
    (3
    )
    
    
    490Gain on sale of available-for-sale securities
    
    
    (6
    )
    
    
    (1,402
    )Loss on other-than-temporary impairment
    
    
    2,138
    
    
    
    70Gain on real estate owned
    
    
    (1
    )
    
    
    Gain on sale of premises and equipment
    
    
    (793
    )
    
    
    FHLB stock dividend
    
    
    
    
    
    
    (169
    )Earnings on bank owned life insurance
    
    
    (84
    )
    
    
    (193
    )Decrease (increase) in accrued interest receivable
    
    
    (233
    )
    
    
    795Increase in income tax receivable, net of payable
    
    
    (1,225
    )
    
    
    (3,163
    )Decrease in prepaid expenses and other assets
    
    
    4,317
    
    
    
    6,120Stock compensation expense
    
    
    81
    
    
    
    89Increase (decrease) in accounts payable, accrued expenses,
and other liabilities
    
    
    (13,859
    )
    
    
    1,104Net cash provided by operating activities
    
    
    (11,696
    )
    
    
    (8,913
    )Cash flows from investing activities:Net (increase) decrease in loans receivable
    
    
    3,797
    
    
    
    (16,767
    )Proceeds from sales of securities available for sale
    
    
    829
    
    
    
    55,446Purchases of securities available for sale
    
    
    
    
    
    
    (65,284
    )Principal paydowns on securities available for sale
    
    
    7,848
    
    
    
    15,802Principal paydowns on securities held to maturity
    
    
    1
    
    
    
    3Proceeds from sale of real estate acquired through foreclosure
    
    
    325
    
    
    
    Purchase of premises and equipment
    
    
    610
    
    
    
    (919
    )Net cash provided by (used in) investing activities
    
    
    13,410
    
    
    
    (11,719
    )Cash flows from financing activities:Net increase in deposits
    
    
    21,206
    
    
    
    43,700Decrease in securities sold under agreements to repurchase
    
    
    (96
    )
    
    
    393Decrease in FHLB advances
    
    
    (35,000
    )
    
    
    (15,000
    )Proceeds from exercise of stock options, including tax benefits
    
    
    
    
    
    
    233Proceeds from shares issued in private offering
    
    
    500
    
    
    
    2,179Dividends paid on common stock
    
    
    
    
    
    
    (707
    )Net cash provided by financing activities
    
    
    (13,390
    )
    
    
    30,798Net increase (decrease) in cash and cash equivalents
    
    
    (11,676
    )
    
    
    10,166Cash and cash equivalents at beginning of period
    
    
    27,040
    
    
    
    14,433Cash and cash equivalents at end of period
    
    $
    15,364
    
    
    $
    24,599
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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business of the Company
 Basis of Presentation
   Allowance for Loan Losses
  Accounting by Creditors for Impairment of a Loan  an amendment of FASB
Statements No. 5 and 15
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Real Estate Owned
 Adoption of new accounting standards Recognition and Presentation of Other-Than-Temporary Impairments,
 Determining Fair Value When the Volume and Level of
Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly
 Interim Disclosures about Fair Value of
Financial Instruments Disclosures about Fair Value of
Financial Instruments
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133.
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##### Table of Contents



Disclosures about Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133)
  2. FAIR VALUE
     Fair Value Measurements
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly. Fair
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Value Measurements
    Fair Value Measurements at March 31, 2009 UsingQuoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Trading securitiesGNMA securities
    
    $
    165
    
    
    $
    
    
    
    $
    165
    
    
    $
    Mutual funds
    
    $
    607
    
    
    $
    607
    
    
    $
    
    
    
    $
    Available for sale securities:Residential mortgage backed
securities
    
    $
    259,015
    
    
    $
    
    
    
    $
    111,952
    
    
    $
    147,063Liabilities:Interest rate swaps
    
    $
    (1,002
    )
    
    $
    
    
    
    $
    (1,002
    )
    
    $
    
 - 10 -




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##### Table of Contents



Fair Value Measurements at December 31, 2008 UsingQuoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Trading securities
    
    $
    744
    
    
    $
    575
    
    
    $
    169
    
    
    $
    Available for sale securities
    
    $
    273,678
    
    
    $
    
    
    
    $
    121,609
    
    
    $
    152,069Liabilities:Interest rate swaps
    
    $
    10,442
    
    
    $
    
    
    
    $
    10,442
    
    
    $
    
  Fair ValueMeasurementsUsing SignificantUnobservableInputsResidentialmortgage-backedBeginning balance at January 1, 2009
    
    $
    152,069Total gains or losses (realized / unrealized)Recognized in earnings:Other-than-temporary impairment
    
    
    (2,138
    )Unrealized in other comprehensive income:Reclassification adjustment for losses
recognized in earnings
    
    
    2,138Transfers in and / or out of Level 3
    
    
    3,809Level 3 fair value adjustment
    
    
    (8,815
    )Ending balance, March 31, 2009
    
    $
    147,063
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##### Table of Contents



Fair ValueMeasurementsUsing SignificantUnobservableInputsAvailable for salesecuritiesBeginning balance at January 1, 2008
    
    $
    Total gains or losses (realized / unrealized)Recognized in earnings:Other-than-temporary impairment
    
    
    (11,824
    )Unrealized in other comprehensive income:Reclassification adjustment for losses
recognized in earnings
    
    
    11,824Transfers into Level 3
    
    
    111,575Level 3 fair value adjustment
    
    
    40,494Ending balance, December 31, 2008
    
    $
    152,069
   Fair Value Measurements at March 31, 2009 UsingQuoted Prices inActive Markets
    
    
    Significant
    
    
    Significantfor Identical
    
    
    Other
    
    
    UnobservableAssets
    
    
    Observable
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    Inputs (Level 2)
    
    
    (Level 3)Assets:Impaired loans
    
    $
    24,290
    
    
    
    
    
    
    $
    24,290
    
    
    
    Real estate owned
    
    $
    11,999
    
    
    
    
    
    
    
    
    
    
    $
    11,999
 Fair Value Measurements at December 31, 2008 UsingQuoted Prices inActive Markets
    
    
    Significant
    
    
    Significantfor Identical
    
    
    Other
    
    
    UnobservableAssets
    
    
    Observable
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    Inputs (Level 2)
    
    
    (Level 3)Assets:Impaired loans
    
    $
    31,508
    
    
    
    
    
    
    $
    31,508
    
    
    
    
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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2009Mortgage-backed securities  pass throughs
    
    $
    47,216
    
    
    $
    462
    
    
    $
    (182
    )
    
    
    47,496Collateralized mortgage obligations
    
    
    81,211
    
    
    
    4
    
    
    
    (7,764
    )
    
    
    73,451Asset-backed securities (underlying securities mortgages)
    
    
    161,816
    
    
    
    440
    
    
    
    (24,756
    )
    
    
    137,500Asset-backed securities
    
    
    1,607
    
    
    
    
    
    
    
    (1,039
    )
    
    
    568$
    291,850
    
    
    $
    906
    
    
    $
    (33,741
    )
    
    $
    259,015
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    50,284
    
    
    $
    315
    
    
    $
    (317
    )
    
    $
    50,282Collateralized mortgage obligations
    
    
    83,376
    
    
    
    
    
    
    
    (6,140
    )
    
    
    77,236Asset-backed securities (underlying securities mortgages)
    
    
    165,721
    
    
    
    748
    
    
    
    (21,010
    )
    
    
    145,459Asset-backed securities
    
    
    1,655
    
    
    
    
    
    
    
    (954
    )
    
    
    701$
    301,036
    
    
    $
    1,063
    
    
    $
    (28,421
    )
    
    $
    273,678
  Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMarch 31, 2009Mortgage-backed securities  pass throughs
    
    $
    38,970
    
    
    $
    (60
    )
    
    $
    8,064
    
    
    $
    (122
    )
    
    $
    47,034
    
    
    $
    (182
    )Collateralized mortgage obligations
    
    
    12,711
    
    
    
    (1,322
    )
    
    
    60,736
    
    
    
    (5,473
    )
    
    
    73,447
    
    
    
    (6,795
    )Asset-backed securities (underlying
securities mortgages)
    
    
    2,954
    
    
    
    (250
    )
    
    
    134,098
    
    
    
    (24,301
    )
    
    
    137,052
    
    
    
    (24,551
    )Asset-backed securities
    
    
    10
    
    
    
    (63
    )
    
    
    557
    
    
    
    (976
    )
    
    
    567
    
    
    
    (1,039
    )$
    54,645
    
    
    $
    (1,695
    )
    
    $
    203,455
    
    
    $
    (30,872
    )
    
    $
    258,100
    
    
    $
    (32,567
    )
 Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    38,969
    
    
    $
    (109
    )
    
    $
    10,998
    
    
    $
    (208
    )
    
    $
    49,967
    
    
    $
    (317
    )Collateralized mortgage obligations
    
    
    55,514
    
    
    
    (4,215
    )
    
    
    21,722
    
    
    
    (1,925
    )
    
    
    77,236
    
    
    
    (6,140
    )Asset-backed securities (underlying securities mortgages)
    
    
    17,144
    
    
    
    (1,504
    )
    
    
    127,567
    
    
    
    (19,506
    )
    
    
    144,711
    
    
    
    (21,010
    )Asset-backed securities
    
    
    12
    
    
    
    (72
    )
    
    
    689
    
    
    
    (882
    )
    
    
    701
    
    
    
    (954
    )$
    111,639
    
    
    $
    (5,900
    )
    
    $
    160,976
    
    
    $
    (22,521
    )
    
    $
    272,615
    
    
    $
    (28,421
    )
 - 13 -




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##### Table of Contents



3/31/2009

    
    12/31/2008Weighted

    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    
    
    
    Average

    
    Amortized
    
    
    
    
    
    Average(Dollars in thousands)
    
    Cost
    
    
    Fair Value
    
    
    Yield

    
    Cost
    
    
    Fair Value
    
    
    YieldMortgage-backed securities  pass throughsDue from one to five years
    
    $
    69
    
    
    $
    68
    
    
    
    -3.70
    %
    
    $
    149
    
    
    $
    146
    
    
    
    3.17
    %Due from five to ten years
    
    
    2,639
    
    
    
    2,725
    
    
    
    5.53
    %
    
    
    2,853
    
    
    
    2,927
    
    
    
    5.89
    %Due over ten years
    
    
    44,508
    
    
    
    44,703
    
    
    
    4.51
    %
    
    
    47,282
    
    
    
    47,209
    
    
    
    4.74
    %Total mortgage backed securities  pass 
throughs (1)
    
    
    47,216
    
    
    
    47,496
    
    
    
    4.56
    %
    
    
    50,284
    
    
    
    50,282
    
    
    
    4.80
    %Collateralized mortgage obligationsDue over ten years
    
    
    81,211
    
    
    
    73,451
    
    
    
    3.93
    %
    
    
    83,376
    
    
    
    77,236
    
    
    
    3.94
    %Total collateralized mortgage obligations
    
    
    81,211
    
    
    
    73,451
    
    
    
    3.93
    %
    
    
    83,376
    
    
    
    77,236
    
    
    
    3.94
    %Asset backed securities (underlying securities mortgages)Due from one to five years
    
    
    1,125
    
    
    
    1,004
    
    
    
    1.04
    %
    
    
    1,125
    
    
    
    1,001
    
    
    
    1.03
    %Due over ten years
    
    
    160,691
    
    
    
    136,496
    
    
    
    2.35
    %
    
    
    164,596
    
    
    
    144,458
    
    
    
    2.33
    %Total asset backed securities
    
    
    161,816
    
    
    
    137,500
    
    
    
    2.34
    %
    
    
    165,721
    
    
    
    145,459
    
    
    
    2.32
    %Asset backed securitiesDue from one to five years
    
    
    307
    
    
    
    41
    
    
    
    4.42
    %
    
    
    355
    
    
    
    47
    
    
    
    5.35
    %Due over ten years
    
    
    1,300
    
    
    
    527
    
    
    
    1.65
    %
    
    
    1,300
    
    
    
    654
    
    
    
    2.52
    %Total asset backed securities
    
    
    1,607
    
    
    
    568
    
    
    
    2.17
    %
    
    
    1,655
    
    
    
    701
    
    
    
    3.13
    %Total
    
    $
    291,850
    
    
    $
    259,015
    
    
    
    3.11
    %
    
    $
    301,036
    
    
    $
    273,678
    
    
    
    3.16
    %
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##### Table of Contents



Disclosures about Fair Value of Financial Instruments
  March 31, 2009
    
    December 31, 2008Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    15,364
    
    
    $
    15,364
    
    
    $
    27,040
    
    
    $
    27,040Securities, held to maturity
    
    
    35
    
    
    
    37
    
    
    
    37
    
    
    
    38Loans receivable, net, including
impaired loans
    
    
    788,270
    
    
    
    820,658
    
    
    
    798,325
    
    
    
    834,633FHLB stock
    
    
    11,501
    
    
    
    n/a
    
    
    
    11,501
    
    
    
    n/aAccrued interest receivable
    
    
    4,130
    
    
    
    4,130
    
    
    
    3,897
    
    
    
    3,897Liabilities:Demand deposits
    
    
    229,892
    
    
    
    229,892
    
    
    
    223,411
    
    
    
    223,411Certificates of deposit
    
    
    690,907
    
    
    
    693,711
    
    
    
    676,183
    
    
    
    680,331FHLB advances
    
    
    155,000
    
    
    
    156,281
    
    
    
    190,000
    
    
    
    191,538Securities sold under
repurchase agreements
    
    
    19,403
    
    
    
    19,809
    
    
    
    19,499
    
    
    
    19,997Subordinated debt
    
    
    25,774
    
    
    
    8,505
    
    
    
    25,774
    
    
    
    8,505Accrued interest payable
    
    
    330
    
    
    
    330
    
    
    
    1,158
    
    
    
    1,158
 Loans
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##### Table of Contents



3. REAL ESTATE OWNED
  March 31,
    
    
    December 31,2009
    
    
    2008Beginning balance real estate owned
    
    $
    7,449
    
    
    $
    Transfer of loans to real estate owned
    
    
    5,674
    
    
    
    12,756Sale proceeds
    
    
    (325
    )
    
    
    Net gain from sale of OREO
    
    
    4
    
    
    
    Loan to facilitate sale of REO
    
    
    
    
    
    
    (750
    )REO sold on contract
    
    
    (803
    )
    
    
    Other reductions
    
    
    
    
    
    
    (149
    )Provision for real estate owned
    
    
    
    
    
    
    (4,408
    )Ending balance real estate owned
    
    $
    11,999
    
    
    $
    7,449
  March 31,
    
    
    December 31,2009
    
    
    2008Beginning valuation on real estate owned
    
    $
    4,408
    
    
    $
    Provision charged to operations
    
    
    
    
    
    
    4,408Amounts related to properties disposed
    
    
    (51
    )
    
    
    Ending valuation on real estate owned
    
    $
    4,357
    
    
    $
    4,408
 4. EARNINGS (LOSS) PER SHARE
  Three months ended March 31, 2009(net income/(loss) amounts
    
    Income/(Loss)
    
    
    Shares
    
    
    Per-Sharein thousands)
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountNet Income (Loss)
    
    $
    (2,082
    )Preferred Dividends
    
    $
    Basic EPS
    
    $
    (2,082
    )
    
    
    6,775,649
    
    
    $
    (0.31
    )Effect of dilutive
stock options
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    (2,082
    )
    
    
    6,775,649
    
    
    $
    (0.31
    )
 Three months ended March 31, 2008Income/(Loss)
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet Income (Loss)
    
    $
    (3,246
    )Preferred Dividends
    
    $
    Basic EPS
    
    $
    (3,246
    )
    
    
    5,590,236
    
    
    $
    (0.58
    )Effect of dilutive
stock options
    
    
    
    
    
    
    
    
    
    
    (0.00
    )Diluted EPS
    
    $
    (3,246
    )
    
    
    5,590,236
    
    
    $
    (0.58
    )
 - 16 -




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##### Table of Contents



5. OTHER-THAN-TEMPORARY IMPAIRMENT
  Recognition and Presentation of
Other-Than-Temporary Impairments,
  Other-than-temporary LossRecognized asCredit Loss inEarningsBeginning balance of credit losses
at January 1, 2009
    
    $
    13,977Current period credit losses
    
    
    2,138Total credit losses
    
    
    16,115Previously recognized other-than-temporary
loss related to non-credit losses
    
    
    (1,467
    )Ending balance of credit losses
at March 31, 2009
    
    $
    14,648
 6. LOANS HELD FOR SALE
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Accounting for
Certain Mortgage Banking Activities
 7. DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 Disclosures about Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133 (SFAS 161)
 Accounting for Derivative Instruments and Hedging Activities,
     - 18 -




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##### Table of Contents



Amount of Gain or (Loss)Amount of Gain or (Loss)
    
    
    Location of Gain or (Loss)
    
    
    Recognized In Income onAmount of Gain or (Loss)
    
    
    Location of Gain or (Loss)
    
    
    Reclassified from
    
    
    Recognized In Income on
    
    
    Derivative (IneffectiveRecognized in OCI on
    
    
    Reclassified from
    
    
    Accumulated
    
    
    Derivative (Ineffective
    
    
    Portion and AmountDerivatives In Statement
    
    Derivative
    
    
    Accumulated OCI Into
    
    
    OCI Into Income
    
    
    Portion and Amount
    
    
    Excluded from133 Cash flow Hedging
    
    (Effective Portion)
    
    
    Income
    
    
    (Effective Portion)
    
    
    Excluded From Effectiveness
    
    
    Effectiveness Testing)Relationships
    
    3/31/2009
    
    
    12/31/2008
    
    
    (Effective Portion)
    
    
    3/31/2009
    
    
    12/31/2008
    
    
    Testing)
    
    
    3/31/2009
    
    
    12/31/2008Interest Rate Products
    
    
    (6,341
    )
    
    
    (6,369
    )
    
    Interest Income
    
    
    56
    
    
    
    
    
    
    Other non-interest expense
    
    
    (24
    )
    
    
    (1
    )(6,341
    )
    
    
    (6,369
    )
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (1
    )
  Asset Derivatives
    
    
    
    
    
    
    
    
    
    
    Liability DerivativesAs of March 31, 2009
    
    
    As of December 31, 2008
    
    
    As of March 31, 2009
    
    
    As of December 31, 2008Balance sheet
    
    
    
    
    
    
    Balance sheet
    
    
    
    
    
    
    Balance sheet
    
    
    
    
    
    
    Balance sheetlocation
    
    
    Fair Value
    
    
    location
    
    
    Fair Value
    
    
    location
    
    
    Fair Value
    
    
    location
    
    
    Fair ValueDerivatives designated as hedging
instruments under SFAS 133Interest Rate Products
    
    Other Assets
    
    
    
    
    
    Other Assets
    
    
    
    
    
    Other Liabilities
    
    
    (1,002
    )
    
    Other Liabilities
    
    
    (10,442
    )Total derivatives designated as hedging
instruments under SFAS 133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,002
    )
    
    
    
    
    
    
    (10,442
    )
  - 19 -




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##### Table of Contents



8. AGREEMENT WITH THE OFFICE OF THRIFT SUPERVISION (OTS)
   9. SUBSEQUENT EVENT
  
 Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Corporate Profile
  Mission and Philosophy
  Multiple Market Strategy
  1.
    
    Diversification of the loan portfolio and economic and credit risk.2.
    
    Options to capitalize on the most favorable growth markets.3.
    
    The capability to deploy the Companys diversified product mix and emphasize
those products that are best suited for the market.
 - 20 -




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##### Table of Contents



4.
    
    The ability to price products strategically among the markets in an attempt to
maximize profitability.
  Product Line Diversification
   Investment Management
  Control Banking Risks
  Performance Measurement
  - 21 -




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##### Table of Contents



Long-term Profitability Drivers
  1.
    
    Growing our non-costing consumer and commercial deposits and continuing to change the
mix of deposits to fewer time based certificates of deposit. This strategy is expected to
lower our deposit cost and increase our net interest margin over time. We have emphasized
the development of low cost business accounts and our full-service, free checking and money
market accounts for consumers.2.
    
    Changing the mix of our loans to higher risk-adjusted spread earning categories such as
business lending, commercial real estate lending, small tract construction,
construction-to-permanent loan lending and selected consumer lending activities such as
home equity line of credit loans, commensurate with our credit policy and the economic
environment.3.
    
    Diversifying and growing our banking fee income through existing and new fee income
sources such as our overdraft protection program and other deposit fees, loan fee income
from mortgage banking, prepayment penalty fees and other loan fees, Harrington Wealth
Management trust and investment fees, and other retail banking fees.4.
    
    Achieving a high level of performance on our investment portfolio by earning a pre-tax
total return consisting of interest income plus net gains and losses on securities and
related total return swaps over one month LIBOR of approximately 1.00% per annum. With our
skills in investment and risk management, we have utilized excess equity capital by
investing in a high credit quality, mortgage and related securities portfolio managed to a
short duration of three to six months. From 2001 to 2004 the investment portfolios
performance exceeded our goals and contributed to our record profit performance due to
favorable selection of securities and spread tightening on these securities. From 2005 to
2006 the investment portfolio underperformed our goal but still earned a total return in
excess of one-month LIBOR. In 2007, 2008 and the first quarter of 2009 the investment
portfolio significantly underperformed our goal as a result of the severe credit market
dislocations. Given our capital requirements of 12% risk based and 7% tangible capital
ratios, we plan to allow the investment portfolio to decline through principle reduction of
approximately $40.0 to $50.0 million per year to build these capital ratios.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.
  Strategic Response to the Current Operating Environment, Housing Downturn, and Economic Recession
   1.
    
    The economy will remain in a major recession throughout most of 2009 with some
improvement in the latter quarters. Housing prices will continue to be under pressure
until mid to late 2009 and then start to stabilize with a very slow climb.2.
    
    A major fiscal stimulus bill and foreclosure reduction program has been enacted. We
expect additional stimulus programs will be implemented in 2009, especially if the housing
market or employment rates do not improve.
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##### Table of Contents



3.
    
    The Federal Reserve will continue to aggressively use non-monetary policy tools to keep
interest and mortgage rates low and improve credit spreads by aggressively buying fixed
income and mortgage assets in order to stimulate buying in the housing market.4.
    
    The Treasury will continue to allocate more TARP funds to banks from its troubled asset
repurchase program.5.
    
    Combined actions will pull the US into a more normal growth environment by mid 2010.
Credit spreads and credit availability will improve moderately over the 2009 to 2010
period.6.
    
    Our Kansas and central California markets will be more insulated from the housing
recession and job losses but still highly affected, with Arizona having higher housing
price depreciation on a median basis. Arizona, however, will have a faster recovery due to
its desirable weather pattern and the strong immigration due to demographic trends and job
availability (higher retirement and more migration from higher cost and colder weather
states).
 HWFGs Response
   1.
    
    Improve Capital Ratios:
   - 23 -




---



##### Table of Contents



2.
    
    Manage Aggressively Problem Assets to Positive Resolution
  3.
    
    Manage and Improve Liquidity of the Bank
  a.
    
    Leverage our intensive sales, marketing and service program that emphasize the
building of core deposits. We have experienced favorable progress in this regard in the
late December 2008 quarter into the March 2009 quarter with growth in deposits, after
losing about 3% of our deposits in the September to December 2008 quarters as the crisis
of confidence in the banking industry became elevated. The higher deposit insurance
levels enacted in 2008 and the reduced amount of high rate paying institutions in our
markets starved for liquidity have improved the situation.b.
    
    Efficiently pledge all mortgage and other eligible collateral to the FHLB and FRB
to increase borrowing capacity to maximum levels.c.
    
    Eliminate brokered deposits over time as the core franchise continues to build.d.
    
    Seek to maintain excess borrowing capacity between $75 and $100 million.e.
    
    The trust preferred securities payments were deferred pending the outcome of our
strategic initiatives.
 4.
    
    Improve Net Interest Margins and Fee Income
 a.
    
    Re-price loan renewals to the current higher spread environment while adding
floors or maintaining floor rates on floating rate loans. Continue to hedge fixed rate
risk.b.
    
    Manage NPAs to a low level to the extent possible to reduce non-accrued
interest.c.
    
    Re-price lower our core deposits to improve margins as the high rate paying
competition diminishes.d.
    
    Expand our deposit fee income sources, HWMC fees, and explore new fee income
programs.
 - 24 -




---



##### Table of Contents



5.
    
    Continue to Manage our Banking Risks to a Low Level
 a.
    
    Interest rate risk through our rigorous assessment and applied hedging process.b.
    
    Operational risk through our policies, procedures and related controls.c.
    
    Liquidity Risk through our core deposit development and back up liquidity plans.d.
    
    Credit Risk though our underwriting and problem asset resolution process.
 6.
    
    Control Operating Costs
   Results of Operations
      (1)
    
    LPB built a high level of liquidity in the March 2009 quarter from the overlap of
higher rate maturing and the renewal of lower rate brokered deposits, new retail
deposits, and higher average borrowing levels, increasing HWFGs overall cost of funds,(2)
    
    The Fed Funds and Prime rates were reduced by 75 bps immediately in January 2009,
and one and three month LIBOR declined over 200 bps in the March 2009 quarter from the
peak of the December 2008 quarter,
on which approximately $450 million of our loans and securities re-price. Our deposits,
however, re-price over a longer period of approximately six to nine months, and
 - 25 -




---



##### Table of Contents



(3)
    
    An increase in non-accrual loans of $5.4 million from December 31, 2008 also
adversely affected net interest income.
   Three Months Ended
    
    
    Three Months EndedMarch 31, 2009
    
    
    March 31, 2008(In thousands)
    
    Balance
    
    
    Income
    
    
    Rate
    
    
    Balance
    
    
    Income
    
    
    RateInterest earning assets:Loans receivable (1)
    
    $
    800,999
    
    
    $
    12,201
    
    
    
    6.12
    %
    
    $
    789,079
    
    
    $
    14,200
    
    
    
    7.21
    %FHLB stock
    
    
    11,501
    
    
    
    
    
    
    
    0.00
    %
    
    
    12,476
    
    
    
    165
    
    
    
    5.32
    %Securities and trading account assets (2)
    
    
    298,477
    
    
    
    2,254
    
    
    
    3.02
    %
    
    
    367,620
    
    
    
    5,126
    
    
    
    5.58
    %Cash and cash equivalents (3)
    
    
    43,533
    
    
    
    16
    
    
    
    0.15
    %
    
    
    17,761
    
    
    
    74
    
    
    
    1.68
    %Total interest earning assets
    
    
    1,154,510
    
    
    
    14,471
    
    
    
    5.03
    %
    
    
    1,186,936
    
    
    
    19,565
    
    
    
    6.60
    %Non-interest-earning assets
    
    
    58,361
    
    
    
    
    
    
    
    
    
    
    
    40,001Total assets
    
    $
    1,212,871
    
    
    
    
    
    
    
    
    
    
    $
    1,226,937Interest bearing liabilities:Deposits:NOW and money market accounts
    
    $
    166,013
    
    
    $
    680
    
    
    
    1.66
    %
    
    $
    125,947
    
    
    $
    828
    
    
    
    2.64
    %Passbook accounts and certificates
of deposit
    
    
    733,748
    
    
    
    5,712
    
    
    
    3.16
    %
    
    
    685,819
    
    
    
    7,654
    
    
    
    4.49
    %Total deposits
    
    
    899,761
    
    
    
    6,392
    
    
    
    2.88
    %
    
    
    811,766
    
    
    
    8,482
    
    
    
    4.20
    %FHLB advances (4)
    
    
    167,700
    
    
    
    1,708
    
    
    
    4.13
    %
    
    
    234,857
    
    
    
    2,547
    
    
    
    4.36
    %Reverse repurchase agreements
    
    
    19,426
    
    
    
    145
    
    
    
    2.99
    %
    
    
    50,336
    
    
    
    388
    
    
    
    3.05
    %Other borrowings (5)
    
    
    25,774
    
    
    
    247
    
    
    
    3.83
    %
    
    
    25,774
    
    
    
    433
    
    
    
    6.65
    %Total interest-bearing liabilities
    
    
    1,112,661
    
    
    
    8,492
    
    
    
    3.09
    %
    
    
    1,122,733
    
    
    
    11,850
    
    
    
    4.23
    %Non-interest-bearing deposits
    
    
    40,541
    
    
    
    
    
    
    
    
    
    
    
    45,449Non-interest-bearing liabilities
    
    
    14,144
    
    
    
    
    
    
    
    
    
    
    
    12,353Total liabilities
    
    
    1,167,346
    
    
    
    
    
    
    
    
    
    
    
    1,180,535Stockholders equity
    
    
    45,525
    
    
    
    
    
    
    
    
    
    
    
    46,402Total liabilities and stockholders equity
    
    $
    1,212,871
    
    
    
    
    
    
    
    
    
    
    $
    1,226,937Net interest-earning assets (liabilities)
    
    $
    41,849
    
    
    
    
    
    
    
    
    
    
    $
    64,203Net interest income/interest rate spread
    
    
    
    
    
    $
    5,979
    
    
    
    1.94
    %
    
    
    
    
    
    $
    7,715
    
    
    
    2.37
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.05
    %
    
    
    
    
    
    
    
    
    
    
    2.60
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    103.76
    %
    
    
    
    
    
    
    
    
    
    
    105.72
    %
 
 1)
    
    Balance includes non-accrual loans. Income includes fees earned on loans originated and
accretion of deferred loan fees.2)
    
    Consists of securities classified as available for sale, held to maturity and trading
account assets. Excludes SFAS 115 adjustments to fair value, which are included in other
non-interest earning assets.3)
    
    Consists of cash due from banks and federal funds sold.4)
    
    Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and
expenseand ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed,
receive floating LIBOR swaps to hedge the short term repricing characteristics of the
floating FHLB advances.5)
    
    Consists of other subordinated debt. - 26 -




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##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008(Dollars in Thousands)Balance at beginning of period
    
    $
    11,449
    
    
    
    6,446Charge-offs:Real estate loans:Commercial
    
    
    (1,773
    )
    
    
    Consumer and other loans
    
    
    (30
    )
    
    
    (1
    )Total charge-offs
    
    
    (1,803
    )
    
    
    (1
    )Recoveries
    
    
    13
    
    
    
    Net charge-offs
    
    
    (1,790
    )
    
    
    (1
    )Provision for losses on loans
    
    
    1,750
    
    
    
    500Balance at end of period
    
    $
    11,409
    
    
    $
    6,945Allowance for loan losses as a percent of total
loans outstanding at the end of the period
    
    
    1.43
    %
    
    
    0.86
    %Ratio of net charge-offs to average loans
outstanding during the period
    
    
    0.22
    %
    
    
    0.00
    %
   - 27 -




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##### Table of Contents



Banking Fee & Other Income
 March
    
    
    December
    
    
    
    
    
    
    March
    
    
    March
    
    
    Annual2009
    
    
    2008
    
    
    %
    
    
    2009
    
    
    2008
    
    
    PercentageQuarter
    
    
    Quarter
    
    
    Change
    
    
    Quarter
    
    
    Quarter
    
    
    ChangeBanking Fee TypeMortgage Brokerage Fee, PrepaymentPenalties & Other Loan Fees
    
    $
    90
    
    
    $
    147
    
    
    
    (38.8
    %)
    
    $
    90
    
    
    $
    147
    
    
    
    (38.8
    %)Deposit, Other Retail Banking Fees & OtherFee Income
    
    
    547
    
    
    
    503
    
    
    
    8.7
    %
    
    
    547
    
    
    
    440
    
    
    
    24.3
    %Harrington Wealth Management Fees
    
    
    187
    
    
    
    198
    
    
    
    (5.6
    %)
    
    
    187
    
    
    
    253
    
    
    
    (26.1
    %)Increase in Cash Surrender Value of LifeInsurance, net
    
    
    84
    
    
    
    63
    
    
    
    33.3
    %
    
    
    84
    
    
    
    193
    
    
    
    (56.5
    %)Total Banking Fee & Other Income
    
    $
    908
    
    
    $
    911
    
    
    
    (0.3
    %)
    
    $
    908
    
    
    $
    1,033
    
    
    
    (12.1
    %)
  - 28 -




---



##### Table of Contents



HWFG Operating Expenses by Category
 Period Ended March 31,2009
    
    
    2008Salaries and employee benefits
    
    $
    3,343
    
    
    $
    3,536Premises and equipment
    
    
    1,006
    
    
    
    993FDIC Insurance Premium
    
    
    217
    
    
    
    128Insurance premiums
    
    
    56
    
    
    
    84Marketing
    
    
    75
    
    
    
    96Computer services
    
    
    251
    
    
    
    256Professional fees
    
    
    203
    
    
    
    135REO Expense
    
    
    231
    
    
    
    8Office expenses and supplies
    
    
    177
    
    
    
    209Other (1)
    
    
    783
    
    
    
    665Total other expenses
    
    $
    6,342
    
    
    $
    6,110
 
 (1)
    
    Consists primarily of regulatory fees, and other miscellaneous expenses. Financial Condition
  Securities and Investment Activities
   - 29 -




---



##### Table of Contents



AmortizedCost
    
    
    Fair ValueMarch 31, 2009Agency MBS
    
    $
    47,216
    
    
    $
    47,496Non-agency mortgage securities
    
    
    80,148
    
    
    
    73,213Subprime mortgage securities
    
    
    160,930
    
    
    
    135,946Other securities
    
    
    3,556
    
    
    
    2,360$
    291,850
    
    
    $
    259,015
 AmortizedCost
    
    
    Fair ValueDecember 31, 2008Agency MBS
    
    $
    50,284
    
    
    $
    50,282Non-agency mortgage securities
    
    
    82,878
    
    
    
    76,522Subprime mortgage securities
    
    
    164,148
    
    
    
    144,274Other securities
    
    
    3,726
    
    
    
    2,600$
    301,036
    
    
    $
    273,678
  AmortizedCost
    
    
    Fair ValueMarch 31, 2009Agency
    
    $
    47,216
    
    
    $
    47,496AAA
    
    
    30,731
    
    
    
    29,364AA
    
    
    77,494
    
    
    
    65,378A
    
    
    26,023
    
    
    
    23,224BBB
    
    
    26,985
    
    
    
    23,817Below investment grade
    
    
    83,401
    
    
    
    69,736$
    291,850
    
    
    $
    259,015
 - 30 -




---



##### Table of Contents



AmortizedCost
    
    
    Fair ValueDecember 31, 2008Agency
    
    $
    50,284
    
    
    $
    50,282AAA
    
    
    49,419
    
    
    
    45,779AA
    
    
    91,981
    
    
    
    80,038A
    
    
    55,412
    
    
    
    49,840BBB
    
    
    25,016
    
    
    
    21,888Below investment grade
    
    
    28,924
    
    
    
    25,851$
    301,036
    
    
    $
    273,678
  AmortizedCost
    
    
    Fair ValueMarch 31, 2009Mortgage-backed securities  pass throughs
    
    $
    47,216
    
    
    
    47,496Collateralized mortgage obligations
    
    
    81,211
    
    
    
    73,451Asset-backed securities (underlying securities mortgages)
    
    
    161,816
    
    
    
    137,500Asset-backed securities
    
    
    1,607
    
    
    
    568$
    291,850
    
    
    $
    259,015
 AmortizedCost
    
    
    Fair ValueDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    50,284
    
    
    $
    50,282Collateralized mortgage obligations
    
    
    83,376
    
    
    
    77,236Asset-backed securities (underlying securities mortgages)
    
    
    165,721
    
    
    
    145,459Asset-backed securities
    
    
    1,655
    
    
    
    701$
    301,036
    
    
    $
    273,678
  - 31 -




---



##### Table of Contents



Loans
    HWFG Net Loan Growth and Mix
 March 31, 2009
    
    
    December 31, 2008
    
    
    March 31, 2008% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofLoan Type
    
    Total
    
    
    Total
    
    
    Total
    
    
    Total
    
    
    Total
    
    
    TotalCommercial Real Estate
    
    $
    260.1
    
    
    
    32.5
    %
    
    $
    260.9
    
    
    
    32.2
    %
    
    $
    267.4
    
    
    
    33.1
    %Multi-family Real Estate
    
    
    84.3
    
    
    
    10.5
    %
    
    
    85.2
    
    
    
    10.4
    %
    
    
    88.8
    
    
    
    10.9
    %Construction (1)
    
    
    116.4
    
    
    
    14.5
    %
    
    
    125.7
    
    
    
    15.4
    %
    
    
    134.1
    
    
    
    16.6
    %Single-family Real Estate
    
    
    144.6
    
    
    
    18.0
    %
    
    
    139.3
    
    
    
    17.2
    %
    
    
    128.8
    
    
    
    15.9
    %Commercial and Industrial Loans
    
    
    112.2
    
    
    
    14.0
    %
    
    
    118.9
    
    
    
    14.7
    %
    
    
    116.8
    
    
    
    14.5
    %Unimproved Land
    
    
    49.6
    
    
    
    6.2
    %
    
    
    48.5
    
    
    
    6.0
    %
    
    
    44.7
    
    
    
    5.5
    %Consumer Loans
    
    
    31.8
    
    
    
    4.0
    %
    
    
    29.8
    
    
    
    3.7
    %
    
    
    24.7
    
    
    
    3.1
    %Other Loans (2)
    
    
    2.2
    
    
    
    0.3
    %
    
    
    3.1
    
    
    
    0.4
    %
    
    
    2.9
    
    
    
    0.4
    %Total Gross Loans
    
    
    801.2
    
    
    
    100.0
    %
    
    
    811.4
    
    
    
    100.0
    %
    
    
    808.2
    
    
    
    100.0
    %Allowance for loan loss
    
    
    (11.4
    )
    
    
    
    
    
    
    (11.4
    )
    
    
    
    
    
    
    (6.9
    )Deferred fees
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    (1.7
    )Discounts/Premiums
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Net Loans Receivable
    
    $
    788.3
    
    
    
    
    
    
    $
    798.3
    
    
    
    
    
    
    $
    799.1
 
 (1)
    
    Includes loans secured by residential, land and commercial properties. At March 31,
2009 we had $27.2 million of construction loans secured by single-family residential
properties, $67.0 million secured by commercial properties, $21.3 million for land
development and $941 thousand secured by multi-family residential properties.(2)
    
    Includes loans collateralized by deposits and consumer line of credit loans.  Deposits
  - 32 -




---



##### Table of Contents



FHLB Advances
  Stockholders Equity
   Liquidity and Capital Resources
 Liquidity 
  - 33 -




---



##### Table of Contents



Capital Resources.
  Asset and Liability Management
  - 34 -




---



##### Table of Contents



i.e.,
    Critical Accounting Policies
  - 35 -




---



##### Table of Contents



Cautionary Statement Regarding Forward-Looking Statements.
    
 Item 3: Quantitative and Qualitative Disclosures about Market Risk
    - 36 -




---



##### Table of Contents



Change In Interest Rates (In Basis Points) (1)-300
    
    -200
    
    -100
    
    Base
    
    +100
    
    +200
    
    +300Market value gain (loss) in assets
    
    $
    28,048
    
    
    $
    22,124
    
    
    $
    11,470
    
    
    
    
    
    
    $
    (14,172
    )
    
    $
    (30,599
    )
    
    $
    (48,032
    )Market value gain (loss) of liabilities
    
    
    (16,598
    )
    
    
    (15,855
    )
    
    
    (9,470
    )
    
    
    
    
    
    
    7,987
    
    
    
    15,833
    
    
    
    24,727Market value gain (loss) of net assets
before interest rate contracts
    
    
    11,450
    
    
    
    6,269
    
    
    
    2,000
    
    
    
    
    
    
    
    (6,185
    )
    
    
    (14,766
    )
    
    
    (23,305
    )Market value gain (loss) of interest
rate contracts
    
    
    (11,391
    )
    
    
    (8,491
    )
    
    
    (4,023
    )
    
    
    
    
    
    
    3,702
    
    
    
    7,111
    
    
    
    10,253Total change in MVPE (2)
    
    $
    59
    
    
    $
    (2,222
    )
    
    $
    (2,023
    )
    
    
    
    
    
    $
    (2,483
    )
    
    $
    (7,655
    )
    
    $
    (13,052
    )Change in MVPE as a percent of:MVPE (2)
    
    
    0.07
    %
    
    
    -2.74
    %
    
    
    -2.49
    %
    
    
    
    
    
    
    -3.06
    %
    
    
    -9.43
    %
    
    
    -16.08
    %Total assets of the Bank (3)
    
    
    -0.16
    %
    
    
    -0.31
    %
    
    
    -0.24
    %
    
    
    
    
    
    
    -0.12
    %
    
    
    -0.47
    %
    
    
    -0.83
    %
 
 (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on the Companys pre-tax tangible MVPE of $87.2 million at March 31, 2009.(3)
    
    Pre-tax tangible MVPE as a percentage of tangible assets.  
 Item 4(T). Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   - 37 -




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##### Table of Contents



PART II OTHER INFORMATION
 
 Item 1:
  
 Item 1A.
  
 Item 2:
  Recent sales of Unregistered Securities
 Price Per
    
    
    Number ofDate
    
    Title of Security
    
    
    Share
    
    
    Shares
    
    
    AmountMarch 31, 2009
    
    Common
    
    $
    2.00
    
    
    
    250,000
    
    
    $
    500,000Total
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    $
    500,000
   
 Item 3:
  
 Item 4:
  
 Item 5:
  
 Item 6:
 EXHIBIT NO.
    
    DESCRIPTION31.1
    
    Section 302 Certification by Chief Executive Officer filed herewith.31.2
    
    Section 302 Certification by Chief Operating Officer filed herewith.31.3
    
    Section 302 Certification by Chief Financial Officer filed herewith.32
    
    Section 906 Certification by Chief Executive Officer, Chief Operating Officer
and Chief Financial Officer furnished herewith.
 - 38 -




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##### Table of Contents



SIGNATURES
  HARRINGTON WEST FINANCIAL GROUP, INC.May 15, 2009
    By:
    /s/ Craig J. CernyCraig J. CernyChairman of the Board
and Chief Executive Officer
(Principal Executive Officer)May 15, 2009
    By:
    /s/ William W. Phillips, jr.William W. Phillips, Jr.President, Chief Operating Officer
(Principal Executive Officer)May 15, 2009
    By:
    /s/ Kerril SteeleKerril SteeleSr. Vice-President, Chief Financial Officer
(Principle Financial and Accounting Officer) - 39 -