##### Table of Contents



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, 2006
 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.)
 
 
 
 
  þ o
  o o þ
 o þ




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##### 



HARRINGTON WEST FINANCIAL GROUP, INC.
 TABLE OF CONTENTS
 PagePart I    Financial InformationItem 1.Condensed Consolidated Financial Statements
    
    
    2Condensed Consolidated Statements of Financial Condition as of March 31, 2006 (Unaudited) and December 31, 2005
    
    
    2Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005 (Unaudited)
    
    
    3Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income for the Three months ended March 31, 2006 (Unaudited) and Year Ended December 31, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4.Controls and Procedures
    
    
    29Part II   Other InformationItem 1.Legal Proceedings
    
    
    30Item 1ARisk Factors
    
    
    30Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.Defaults upon Senior Securities
    
    
    30Item 4.Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.Other Information
    
    
    30Item 6.Exhibits
    
    
    30Signatures
    
    
    31Certifications
    
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32
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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 share data)
    
    March 31, 2006
    
    
    December 31, 2005ASSETSCash and cash equivalents
    
    $
    18,540
    
    
    $
    19,312Trading account assets
    
    
    1,210
    
    
    
    975Securities available for sale
    
    
    365,840
    
    
    
    387,352Securities held to maturity
    
    
    77
    
    
    
    80Loans receivable, net of allowance for loan losses of $5,800 and
$5,661 at March 31, 2006 and December 31, 2005, respectively
    
    
    683,868
    
    
    
    672,890Accrued interest receivable
    
    
    4,309
    
    
    
    4,463Real estate owned
    
    
    1,050
    
    
    
    Premises and equipment, net
    
    
    11,547
    
    
    
    10,276Due from broker
    
    
    2,101
    
    
    
    Prepaid expenses and other assets
    
    
    4,482
    
    
    
    3,783Investment in FHLB stock, at cost
    
    
    16,556
    
    
    
    16,364Income taxes receivable
    
    
    
    
    
    
    251Bank-owned life insurance
    
    
    17,853
    
    
    
    17,621Deferred tax asset
    
    
    
    
    
    
    137Goodwill
    
    
    5,496
    
    
    
    5,496Core deposit intangible, net
    
    
    1,124
    
    
    
    1,187TOTAL ASSETS
    
    $
    1,134,053
    
    
    $
    1,140,187LIABILITIES & STOCKHOLDERS EQUITYDeposits:Interest bearing
    
    $
    645,390
    
    
    $
    619,213Non-interest bearing
    
    
    51,373
    
    
    
    49,932Total Deposits
    
    
    696,763
    
    
    
    669,145FHLB advances
    
    
    285,000
    
    
    
    319,000Securities sold under repurchase agreements
    
    
    59,134
    
    
    
    59,013Subordinated debt
    
    
    25,774
    
    
    
    25,774Due to broker
    
    
    
    
    
    
    2,474Accrued interest payable and other liabilities
    
    
    3,422
    
    
    
    5,207Income taxes payable
    
    
    1,016
    
    
    
    Deferred tax liability
    
    
    586
    
    
    
    TOTAL LIABILITIES
    
    
    1,071,695
    
    
    
    1,080,613STOCKHOLDERS EQUITYPreferred stock, $.01 par value: 1,200,000 shares authorized: none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 10,800,000 shares authorized: 5,418,843 and 5,384,843 shares issued and outstanding as
of March 31, 2006 and December 31, 2005, respectively
    
    
    54
    
    
    
    54Additional paid-in capital
    
    
    32,333
    
    
    
    32,059Retained earnings
    
    
    30,878
    
    
    
    29,458Accumulated other comprehensive loss, net of tax
    
    
    (907
    )
    
    
    (1,997
    )Total Stockholders Equity
    
    
    62,358
    
    
    
    59,574TOTAL LIABILITIES & STOCKHOLDERS EQUITY
    
    $
    1,134,053
    
    
    $
    1,140,187
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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 Dollars in thousands, except share data
 Three months endedMarch 31,2006
    
    
    2005INTEREST INCOMEInterest on loans
    
    $
    12,654
    
    
    $
    9,908Interest and dividends on securities
    
    
    5,010
    
    
    
    4,400Total interest income
    
    
    17,664
    
    
    
    14,308INTEREST EXPENSEInterest on deposits
    
    
    5,247
    
    
    
    3,085Interest on FHLB advances and other borrowings
    
    
    4,611
    
    
    
    3,662Total interest expense
    
    
    9,858
    
    
    
    6,747NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES
    
    
    7,806
    
    
    
    7,561PROVISION FOR LOAN LOSSES
    
    
    140
    
    
    
    150NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    7,666
    
    
    
    7,411OTHER INCOME (LOSS)Net gain/(loss) on sale of AFS securities
    
    
    (466
    )
    
    
    50Income from trading assets
    
    
    721
    
    
    
    662Other income (loss) gain
    
    
    (4
    )
    
    
    (7
    )Banking fee income
    
    
    915
    
    
    
    858Total other income
    
    
    1,166
    
    
    
    1,563OTHER EXPENSESSalaries & employee benefits
    
    
    3,007
    
    
    
    2,811Premises & equipment
    
    
    854
    
    
    
    904Insurance premiums
    
    
    131
    
    
    
    125Marketing
    
    
    105
    
    
    
    99Computer services
    
    
    192
    
    
    
    181Consulting fees
    
    
    302
    
    
    
    362Office expenses & supplies
    
    
    243
    
    
    
    214Other
    
    
    558
    
    
    
    514Total other expenses
    
    
    5,392
    
    
    
    5,210INCOME BEFORE INCOME TAXES
    
    
    3,440
    
    
    
    3,764INCOME TAXES
    
    
    1,342
    
    
    
    1,529NET INCOME
    
    $
    2,098
    
    
    $
    2,235BASIC EARNINGS PER SHARE
    
    $
    0.39
    
    
    $
    0.42DILUTED EARNINGS PER SHARE
    
    $
    0.38
    
    
    $
    0.40BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,410,370
    
    
    
    5,291,640DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,564,236
    
    
    
    5,616,246
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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
 (Dollars in thousands, except share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Amt
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Income
    
    
    EquityBalance, January 1, 2005
    
    
    5,278,934
    
    
    $
    53
    
    
    $
    31,225
    
    
    $
    23,637
    
    
    
    
    
    
    
    ($2,255
    )
    
    $
    52,660Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,336
    
    
    $
    8,336
    
    
    
    
    
    
    
    8,336Other comprehensive income, net of taxUnrealized (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,270
    )
    
    
    (2,270
    )
    
    
    (2,270
    )Effective portion of change in
fair value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,528
    
    
    
    2,528
    
    
    
    2,528Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,594Stock options, exercised, including
tax benefit of $250
    
    
    105,909
    
    
    
    1
    
    
    
    834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    835Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,515
    )
    
    
    
    
    
    
    
    
    
    
    (2,515
    )Balance, December 31, 2005
    
    
    5,384,843
    
    
    
    54
    
    
    
    32,059
    
    
    
    29,458
    
    
    
    
    
    
    
    (1,997
    )
    
    
    59,574Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,098
    
    
    $
    2,098
    
    
    
    
    
    
    
    2,098Other comprehensive income,
net of taxUnrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    46
    
    
    
    46Effective portion in change in
fair value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,044
    
    
    
    1,044
    
    
    
    1,044Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,188Stock options, exercised
    
    
    34,000
    
    
    
    
    
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Stock options expensed
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (678
    )
    
    
    
    
    
    
    
    
    
    
    (678
    )Balance, March 31, 2006
    
    
    5,418,843
    
    
    $
    54
    
    
    $
    32,333
    
    
    $
    30,878
    
    
    
    
    
    
    
    ($907
    )
    
    $
    62,358
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HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (Unaudited)  Dollars in thousands)
 Three months endedMarch 31,2006
    
    
    2005DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding (loss) arising during period,
net of tax (benefit) expense of ($124) and ($511) for the
three-months ending March 31, 2006 and 2005, respectively
    
    $
    (238
    )
    
    $
    (745
    )Less: Reclassification adjustment for gains (losses) included
in net income, net of tax expense (benefit) of ($182) and
$20 for the three months ended March 31, 2006 and 2005,
respectively
    
    
    (284
    )
    
    
    30Net unrealized (loss) on securities, net of tax (benefit) expense
of $58 and ($533) for the three months ended,
March 31, 2006 and 2005, respectively
    
    $
    46
    
    
    $
    (775
    )Unrealized net gain (loss) on cash flow hedges, net of tax expense
(benefit) of $667 and $1,282 for the three months
ending March 31, 2006 and 2005, respectively
    
    $
    1,043
    
    
    $
    1,868Less: Reclassification adjustment for net gains on cash
flow hedges included in net income, net of tax
expense of ($1) and $50 for the three months ended
March 31, 2006 and 2005, respectively
    
    
    (1
    )
    
    
    73Net unrealized gain (loss) on cash flow hedges, net of tax expense
(benefit) of $668 and $1,232 for the three months ended
March 31, 2006 and 2005, respectively
    
    $
    1,044
    
    
    $
    1,795Total change in Other Comprehensive Income
    
    $
    1,090
    
    
    $
    1,020
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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 (Dollars in thousands)
 Three Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,098
    
    
    $
    2,235Adjustments to reconcile net income to net cash provided by operating activities:Accretion of deferred loan fees and costs
    
    
    (218
    )
    
    
    139Depreciation and amortization
    
    
    335
    
    
    
    345Amortization of premiums and discounts on loans receivable and securities
    
    
    589
    
    
    
    714Provision for loan losses
    
    
    140
    
    
    
    150Loss (gain) on sale of investment securities
    
    
    340
    
    
    
    (50
    )Activity in securities held for trading
    
    
    (235
    )
    
    
    135FHLB stock dividend
    
    
    (192
    )
    
    
    (Increase) decrease in accrued interest receivable
    
    
    154
    
    
    
    (109
    )Increase (decrease) in income taxes (payable) receivable
    
    
    1,267
    
    
    
    677Stock options expensed
    
    
    109
    
    
    
    Deferred income taxes
    
    
    723
    
    
    
    701(Increase) decrease in prepaid expenses and other assets
    
    
    (688
    )
    
    
    (22
    )(Decrease) increase in accounts payable, accrued expenses,
and other liabilities
    
    
    (3,880
    )
    
    
    (2,325
    )Net cash provided by operating activities
    
    
    542
    
    
    
    2,590Cash flows from investing activities:Net (increase) decrease in loans receivable
    
    
    (11,969
    )
    
    
    (23,361
    )Proceeds from sales of securities available for sale
    
    
    15,373
    
    
    
    3,045Principal paydowns on securities available for sale
    
    
    22,064
    
    
    
    19,699Principal paydowns on securities held to maturity
    
    
    3
    
    
    
    2Purchases of securities available for sale
    
    
    (18,464
    )
    
    
    (14,844
    )Net purchase of premises and equipment
    
    
    (1,547
    )
    
    
    (557
    )Sale (purchase) of FHLB Stock
    
    
    
    
    
    
    (329
    )Net cash (used in) provided by investing activities
    
    
    5,460
    
    
    
    (16,345
    )Cash flows from financing activities:Net (decrease) increase in deposits
    
    
    27,618
    
    
    
    3,336(Decrease) Increase in securities sold under agreements to repurchase
    
    
    121
    
    
    
    (210
    )(Decrease) increase in FHLB advances
    
    
    (34,000
    )
    
    
    9,000Exercise of stock options on common stock
    
    
    165
    
    
    
    561Dividends paid on common stock
    
    
    (678
    )
    
    
    (581
    )Net cash (used in) provided by financing activities
    
    
    (6,774
    )
    
    
    12,106Net (decrease) increase in cash and cash equivalents
    
    
    (772
    )
    
    
    (1,649
    )Cash and cash equivalents at beginning of period
    
    
    19,312
    
    
    
    13,238Cash and cash equivalents at end of period
    
    $
    18,540
    
    
    $
    11,589SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for:Interest
    
    $
    8,101
    
    
    $
    6,236Income Taxes
    
    $
    60
    
    
    $
    
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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  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
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Stock-Based Compensation  Share-based Payment
 Accounting for Stock Issued to
Employees, Accounting for Stock-Based Compensation
   2005 Equity Based Compensation Plan 
 - 8 -




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
    
    the 2005 Plan authorizes the granting of:
 
 
    
    vesting restrictions on awards may be time based and/or performance based;
    
    participation in the 2005 Plan is limited to officers at the level of Vice
President or above and other employees who provide substantial services to the
Company as well as the Companys directors;
    
    the 2005 Plan provides for a maximum of a floating ten percent (10%) of the
Companys issued and outstanding shares of common stock that may be delivered for
awards subject to adjustment as set forth therein; and
    
    the maximum number of Incentive Stock Options (ISO) that may be issued under the
Plan is the lesser of 1,000,000 or the maximum number of shares allocated to the
Plan.
    
    the right to acquire stock may not remain outstanding more than 10 years after
the grant date, and any ISO Award granted to any eligible employee owning more than
10% of the Companys stock must be granted at 110% of the fair market value of the
stock. Awards do not vest or become exercisable until six months after the date of
grant.
 
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Three months endedMarch 31, 2005Pro Forma ResultsNet income:As reported
    
    $
    2,235Total stock-based employee compensation
expense under the fair value based method for all
awards, net of related tax effects
    
    
    55Pro forma net income (APB 25)
    
    $
    2,180Earnings per share  basic:As reported
    
    $
    0.42Pro forma
    
    $
    0.41Earnings per share  diluted:As reported
    
    $
    0.40Pro forma
    
    $
    0.39
  2006
    
    
    2005Risk free interest rate:
    
    
    4.36
    %
    
    
    4.3
    %Expected option term (years):
    
    
    6.68
    
    
    
    9.00Expected stock price volatility:
    
    
    51.3
    %
    
    
    40.7
    %Contractual lives
    
    
    10
    
    
    
    10Dividend yield
    
    
    2.98
    %
    
    
    2.66
    %Weighted average fair value of options granted
    
    $
    7.09
    
    
    $
    8.20
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March 31,($ in Thousands Except Per Share Information)
    
    2006Weighted-Average
    
    
    AggregateExercise
    
    
    IntrinsicShares
    
    
    Price
    
    
    ValueIncentive stock options:Outstanding, beginning of year
    
    
    620,440
    
    
    $
    9.60Granted
    
    
    102,000
    
    
    $
    16.80Expired unexercised
    
    
    (1,000
    )
    
    $
    16.88Options exercised
    
    
    (34,000
    )
    
    $
    4.86Outstanding, end of the period
    
    
    687,440
    
    
    $
    10.90
    
    
    $
    3,848Exercisable, end of the period
    
    
    454,426
    
    
    $
    8.21
    
    
    $
    3,637
 Recent Accounting Pronouncements
 Accounting for Servicing of Financial Asset
 3. EARNINGS PER SHARE
  Three months ended March 31, 2006Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    2,098
    
    
    
    5,410,370
    
    
    $
    0.39Effect of dilutive stock options
    
    
    
    
    
    
    153,866
    
    
    
    (0.01
    )Diluted EPS
    
    $
    2,098
    
    
    
    5,564,236
    
    
    $
    0.38
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Three months ended March 31, 2005Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    2,235
    
    
    
    5,291,640
    
    
    $
    0.42Effect of dilutive stock options
    
    
    
    
    
    
    324,606
    
    
    
    (0.02
    )Diluted EPS
    
    $
    2,235
    
    
    
    5,616,246
    
    
    $
    0.40
 4. COMMITMENTS AND CONTINGENCIES
  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
    
    $
    515,718
    
    
    $
    479,976
    
    
    $
    153
    
    
    $
    25,258
    
    
    $
    10,331FHLB advances
    
    
    285,000
    
    
    
    266,000
    
    
    
    
    
    
    
    19,000
    
    
    
    Reverse Repurchase Agreements
    
    
    59,134
    
    
    
    134
    
    
    
    44,000
    
    
    
    15,000
    
    
    
    Leases
    
    
    21,166
    
    
    
    1,295
    
    
    
    2,634
    
    
    
    2,694
    
    
    
    14,543Subordinated debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Total contractual
obligations
    
    $
    906,792
    
    
    $
    747,405
    
    
    $
    46,787
    
    
    $
    61,952
    
    
    $
    50,648
 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
    
    $
    41,609
    
    
    $
    35,183
    
    
    $
    3,506
    
    
    $
    824
    
    
    $
    2,096Consumer lines of credit(1)
    
    
    48,335
    
    
    
    3,239
    
    
    
    
    
    
    
    402
    
    
    
    44,694Undisbursed portion of loans in process
    
    
    77,473
    
    
    
    35,763
    
    
    
    41,710
    
    
    
    
    
    
    
    Approved but, unfunded mortgage loans
    
    
    5,832
    
    
    
    5,832
    
    
    
    
    
    
    
    
    
    
    
    Approved but, unfunded commercial
loans
    
    
    3,320
    
    
    
    3,320
    
    
    
    
    
    
    
    
    
    
    
    Approved but unfunded consumer loans
    
    
    1,931
    
    
    
    1,931
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    4,522
    
    
    
    3,022
    
    
    
    1,500
    
    
    
    
    
    
    
    Total commitments
    
    $
    183,022
    
    
    $
    88,290
    
    
    $
    46,716
    
    
    $
    1,226
    
    
    $
    46,790
 
 (1)
    
    Line of credit with no stated maturity date is included in commitments for less than one
year. 
 Item 2: Managements Discussion and Analysis of Final Results of the Quarter
 Corporate Profile
  - 12 -




---



##### Table of Contents



Mission and Philosophy
  Multiple Market Strategy
   1.
    
    Diversify the loan portfolio and thus economic and credit risk2.
    
    Capitalize on the most favorable growth markets3.
    
    Deploy elements of our diverse product mix that are best suited for
each market4.
    
    Price products strategically among the markets to maximize
profitability.
  - 13 -




---



##### Table of Contents



Product Line Diversification
  Modern Financial and Investment Management Skills
  Control Banking Risks
  Concentrate on Selected Performance Measures
  Profitability Drivers
  1.
    
    Steady development and growth of loans, deposits, and investment management and
trust accounts in all of our markets.2.
    
    Changing the loan mix 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 lines.
 
 - 14 -




---



##### Table of Contents



3.
    
    Growing our non-costing consumer and commercial deposits and continuing to
change the overall deposit mix to core deposit accounts.4.
    
    Diversifying and increasing our banking fee income through existing and new
sources such as our overdraft protection program, loan income from mortgage banking,
prepayment penalties, and Harrington Wealth Management trust and investment revenue.5.
    
    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.6.
    
    Controlling interest rate risk of the institution to a low level and seeking
high credit quality of the loan and investment portfolios.
  Results of Operations
   - 15 -




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##### Table of Contents



Three months ended March 31,2006
    
    
    2005Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/ Cost
    
    
    Balance
    
    
    Interest
    
    
    Yield/ Cost(Dollars in thousands)Interest-earning assets:Loans receivable (1)
    
    $
    684,183
    
    
    $
    12,654
    
    
    
    7.43
    %
    
    $
    614,185
    
    
    $
    9,908
    
    
    
    6.45
    %FHLB stock
    
    
    16,396
    
    
    
    194
    
    
    
    4.80
    %
    
    
    15,388
    
    
    
    145
    
    
    
    3.78
    %Securities and trading account assets (2)
    
    
    388,578
    
    
    
    4,765
    
    
    
    4.91
    %
    
    
    426,506
    
    
    
    4,220
    
    
    
    3.96
    %Cash and cash equivalents (3)
    
    
    11,442
    
    
    
    51
    
    
    
    1.81
    %
    
    
    8,898
    
    
    
    35
    
    
    
    1.57
    %Total interest-earning assets
    
    
    1,100,599
    
    
    
    17,664
    
    
    
    6.44
    %
    
    
    1,064,977
    
    
    
    14,308
    
    
    
    5.37
    %Noninterest-earning assets
    
    
    46,948
    
    
    
    
    
    
    
    
    
    
    
    25,629Total assets
    
    $
    1,147,547
    
    
    
    
    
    
    
    
    
    
    $
    1,090,606Interest-bearing liabilities:Deposits:NOW and money market accounts
    
    $
    110,680
    
    
    $
    549
    
    
    
    2.01
    %
    
    $
    119,486
    
    
    $
    386
    
    
    
    1.29
    %Passbook accounts and certificates of
deposit
    
    
    514,849
    
    
    
    4,698
    
    
    
    3.70
    %
    
    
    449,105
    
    
    
    2,699
    
    
    
    2.40
    %Total deposits
    
    
    625,529
    
    
    
    5,247
    
    
    
    3.40
    %
    
    
    568,591
    
    
    
    3,085
    
    
    
    2.17
    %FHLB advances (4)
    
    
    322,100
    
    
    
    3,712
    
    
    
    4.67
    %
    
    
    320,900
    
    
    
    2,812
    
    
    
    3.51
    %Reverse Repurchase Agreements
    
    
    59,102
    
    
    
    436
    
    
    
    2.95
    %
    
    
    79,611
    
    
    
    514
    
    
    
    2.58
    %Other borrowings (5)
    
    
    25,774
    
    
    
    463
    
    
    
    7.19
    %
    
    
    25,000
    
    
    
    336
    
    
    
    5.38
    %Total interest-bearing liabilities
    
    
    1,032,505
    
    
    
    9,858
    
    
    
    3.85
    %
    
    
    994,102
    
    
    
    6,747
    
    
    
    2.71
    %Non-interest-bearing deposits
    
    
    48,595
    
    
    
    
    
    
    
    
    
    
    
    35,164Non-interest-bearing liabilities
    
    
    5,747
    
    
    
    
    
    
    
    
    
    
    
    7,054Total liabilities
    
    
    1,086,847
    
    
    
    
    
    
    
    
    
    
    
    1,036,320Stockholders equity
    
    
    60,700
    
    
    
    
    
    
    
    
    
    
    
    54,286Total liabilities and stockholders equity
    
    $
    1,147,547
    
    
    
    
    
    
    
    
    
    
    $
    1,090,606Net interest-earning assets (liabilities)
    
    $
    68,094
    
    
    
    
    
    
    
    
    
    
    $
    70,875Net interest income/interest rate spread
    
    
    
    
    
    $
    7,806
    
    
    
    2.59
    %
    
    
    
    
    
    $
    7,561
    
    
    
    2.66
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.83
    %
    
    
    
    
    
    
    
    
    
    
    2.84
    %Ratio of average interest-earnings assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.60
    %
    
    
    
    
    
    
    
    
    
    
    107.13
    %
 
 1)
    
    Includes non-accrual loans. Interest income includes fees earned on loans
originated.2)
    
    Consists of securities classified as available for sale, held to maturity and
trading account assets.3)
    
    Consists of cash and due from banks and federal funds sold.4)
    
    Interest on FHLB advances is net of hedging costs. Hedging costs include
interest income and expense and ineffectiveness adjustments for cash flow hedges. The
Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing
characteristics of the floating FHLB advances.5)
    
    Consists of subordinated debt and note payable under a revolving line of
credit. 
 - 16 -




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##### Table of Contents



Three Months EndedMarch 31, 2006 vs. March 31,2005Increase (decrease) due to:Total NetIncreaseRate
    
    
    Volume
    
    
    Rate/ Volume
    
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable (1)
    
    $
    6,019
    
    
    $
    4,515
    
    
    
    ($7,788
    )
    
    $
    2,746FHLB stock
    
    
    157
    
    
    
    38
    
    
    
    (146
    )
    
    
    49Securities and trading account assets (2)
    
    
    4,052
    
    
    
    (1,502
    )
    
    
    (2,005
    )
    
    
    545Cash and cash equivalents (3)
    
    
    21
    
    
    
    40
    
    
    
    (45
    )
    
    
    16Total net change in income on interest-
earning assets
    
    
    10,249
    
    
    
    3,091
    
    
    
    (9,984
    )
    
    
    3,356Interest-bearing liabilities:DepositsNOW and money market accounts
    
    
    860
    
    
    
    (114
    )
    
    
    (583
    )
    
    
    163Passbook accounts and certificates
of deposit
    
    
    5,838
    
    
    
    1,578
    
    
    
    (5,417
    )
    
    
    1,999Total deposits
    
    
    6,698
    
    
    
    1,464
    
    
    
    (6,000
    )
    
    
    2,162FHLB advances (4)
    
    
    3,722
    
    
    
    42
    
    
    
    (2,864
    )
    
    
    900Reverse Repurchase Agreements
    
    
    295
    
    
    
    (529
    )
    
    
    156
    
    
    
    (78
    )Other borrowings (5)
    
    
    453
    
    
    
    42
    
    
    
    (368
    )
    
    
    127Total net change in expense on interest-
bearing liabilities
    
    
    11,168
    
    
    
    1,019
    
    
    
    (9,076
    )
    
    
    3,111Change in net interest income
    
    
    ($919
    )
    
    $
    2,072
    
    
    
    ($908
    )
    
    $
    245
 
 1)
    
    Includes non-accrual loans. Interest income includes fees earned on
loans originated.2)
    
    Consists of securities classified as available for sale, held to
maturity and trading account assets.3)
    
    Consists of cash and due from banks and federal funds sold.4)
    
    Interest on FHLB advances is net of hedging costs. Hedging costs
include interest income and expense and ineffectiveness adjustments for cash flow
hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the
short term repricing characteristics of the floating FHLB advances.5)
    
    Consists of subordinated debt and a note payable under a revolving line
of credit. 
 - 17 -




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##### Table of Contents



For the Quarter EndedMarch 31,2006
    
    
    2005(Dollars in thousands)Balance at beginning of period
    
    $
    5,661
    
    
    $
    5,228Charge-offs:Real estate loansSingle-family residentialMulti-family residentialCommercialConsumer and other loans
    
    
    (1
    )
    
    
    (1
    )Total charge-offs
    
    
    (1
    )
    
    
    (1
    )Net charge-offs
    
    
    (1
    )
    
    
    (1
    )Provision (credit) for losses on loans
    
    
    140
    
    
    
    150Balance at end of period
    
    $
    5,800
    
    
    $
    5,377Allowance for loan losses as a percent of
total loans outstanding
    
    
    0.84
    %
    
    
    0.85
    %Ratio of net charge-offs to average loans
outstanding
    
    
    
    %
    
    
    
    %
 - 18 -




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- 19 -




---



##### Table of Contents



March
    
    March2006
    
    2005Banking Fee Type
    
    Quarter
    
    Quarter
    
    % ChangeMortgage Brokerage Fees, Prepayment Penalties and
Other Loan Fees
    
    
    $ 208
    
    
    
    $ 377
    
    
    
    (44.8
    )%Deposit, Other Retail Banking Fees and Other Fee Income
    
    
    319
    
    
    
    317
    
    
    
    .6
    %Harrington Wealth Management Fees
    
    
    197
    
    
    
    164
    
    
    
    20.1
    %BOLI
    
    
    191
    
    
    
    
    
    
    
    n/a$915
    
    
    
    $858
    
    
    
    6.6
    %
   Financial Condition
  - 20 -




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##### Table of Contents



March 31, 2006
    
    
    December 31, 2005
    
    
    Change(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    AmountReal Estate Loans:Single-family
    
    $
    111,535
    
    
    
    16.1
    %
    
    $
    115,925
    
    
    
    17.0
    %
    
    $
    (4,390
    )Multi-family
    
    
    82,351
    
    
    
    11.9
    
    
    
    80,855
    
    
    
    11.9
    
    
    
    1,496Commercial
    
    
    252,715
    
    
    
    36.5
    
    
    
    253,208
    
    
    
    37.2
    
    
    
    (493
    )Construction (1)
    
    
    83,498
    
    
    
    12.0
    
    
    
    70,883
    
    
    
    10.4
    
    
    
    12,615Land acquisition and development
    
    
    39,282
    
    
    
    5.7
    
    
    
    36,085
    
    
    
    5.3
    
    
    
    3,197Commercial and industrial loans
    
    
    95,302
    
    
    
    13.8
    
    
    
    96,566
    
    
    
    14.2
    
    
    
    (1,264
    )Consumer loans
    
    
    26,276
    
    
    
    3.8
    
    
    
    26,653
    
    
    
    3.9
    
    
    
    (377
    )Other loans (2)
    
    
    1,406
    
    
    
    0.2
    
    
    
    1,271
    
    
    
    0.1
    
    
    
    135Total loans receivable
    
    
    692,365
    
    
    
    100.0
    %
    
    
    681,446
    
    
    
    100.0
    %
    
    
    10,919Less:Allowance for loan loss
    
    
    (5,800
    )
    
    
    
    
    
    
    (5,661
    )
    
    
    
    
    
    
    (139
    )Net deferred loan fees
    
    
    (2,280
    )
    
    
    
    
    
    
    (2,498
    )
    
    
    
    
    
    
    218Net premiums
    
    
    (417
    )
    
    
    
    
    
    
    (397
    )
    
    
    
    
    
    
    (20
    )(8,497
    )
    
    
    
    
    
    
    (8,556
    )
    
    
    
    
    
    
    59Loans receivable, net
    
    $
    683,868
    
    
    
    
    
    
    $
    672,890
    
    
    
    
    
    
    $
    10,978
 
 (1)
    
    Includes loans secured by residential, land and commercial properties. At March 31,
2006, we had $61.3 million of construction loans secured by residential properties, $7.4
million secured by commercial properties and $14.8 million for land development.(2)
    
    Includes loans collateralized by deposits and consumer line of credit loans.  - 21 -




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Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities Available for Sale:March 31, 2006Mortgage-backed securities  pass through
    
    $
    112,975
    
    
    $
    79
    
    
    $
    (2,433
    )
    
    $
    110,621Collateralized mortgage obligations
    
    
    72,250
    
    
    
    
    
    
    
    (1,069
    )
    
    
    71,181Commercial mortgage-backed securities
    
    
    40,027
    
    
    
    
    
    
    
    (521
    )
    
    
    39,506Asset-backed securities (underlying
securities mortgages)
    
    
    141,056
    
    
    
    883
    
    
    
    (199
    )
    
    
    141,740Asset-backed security
    
    
    2,767
    
    
    
    75
    
    
    
    (50
    )
    
    
    2,792$
    369,075
    
    
    $
    1,037
    
    
    $
    (4,272
    )
    
    $
    365,840
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities Available for Sale:December 31, 2005Mortgage-backed securities  pass through
    
    $
    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 security
    
    
    3,335
    
    
    
    52
    
    
    
    (149
    )
    
    
    3,238$
    390,691
    
    
    $
    862
    
    
    $
    (4,201
    )
    
    $
    387,352
  - 22 -




---



##### Table of Contents



Less than 12 Months
    
    
    12 Months or More
    
    
    Total(Dollars in thousands)as of March 31, 2006Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed
securities  pass
through
    
    $
    51,935
    
    
    $
    (797
    )
    
    $
    49,186
    
    
    $
    (1,636
    )
    
    $
    101,121
    
    
    $
    (2,433
    )Collateralized
mortgage obligations
    
    
    49,560
    
    
    
    (251
    )
    
    
    21,622
    
    
    
    (818
    )
    
    
    71,182
    
    
    
    (1,069
    )Commercial
mortgage-backed
securities
    
    
    33,063
    
    
    
    (401
    )
    
    
    6,443
    
    
    
    (120
    )
    
    
    39,506
    
    
    
    (521
    )Asset-backed
securities (underlying
securities mortgages)
    
    
    23,937
    
    
    
    (126
    )
    
    
    2,636
    
    
    
    (73
    )
    
    
    26,573
    
    
    
    (199
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    2,098
    
    
    
    (50
    )
    
    
    2,098
    
    
    
    (50
    )$
    158,495
    
    
    $
    (1,575
    )
    
    $
    81,985
    
    
    $
    (2,697
    )
    
    $
    240,480
    
    
    $
    (4,272
    )
 Less than 12 Months
    
    
    12 Months or More
    
    
    Total(Dollars in thousands)as of December 31, 2005Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed
securities  pass
through
    
    $
    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
    )
  - 23 -




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##### Table of Contents



Amortized
    
    
    Unrealized
    
    
    PledgedCost
    
    
    Gains (Losses)
    
    
    Fair Value
    
    
    Securities(Dollars in thousands)March 31, 2006
    
    $
    892
    
    
    $
    318
    
    
    $
    1,210
    
    
    $
    268December 31, 2005
    
    $
    846
    
    
    $
    128
    
    
    $
    975
    
    
    $
    275
  Amortized
    
    
    Unrealized
    
    
    
    
    
    
    PledgedCost
    
    
    Gains (Losses)
    
    
    Fair Value
    
    
    Securities(Dollars in thousands)March 31, 2006
    
    $
    77
    
    
    $
    3
    
    
    $
    80
    
    
    $
    December 31, 2005
    
    $
    80
    
    
    $
    4
    
    
    $
    84
    
    
    $
    
   - 24 -




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Liquidity and Capital Resources
 Liquidity.
    - 25 -




---



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Capital Resources.
  Asset and Liability Management
    - 26 -




---



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i.e.,
    Accounting for Derivative Instruments and Hedging
Activities,
 - 27 -




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Critical Accounting Policies
  Cautionary Statement Regarding Forward-Looking Statements.
    
 Item 3: Quantitative and Qualitative Disclosures about Market Risk
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Change In Interest Rates (In Basis Points)(1)-300
    
    
    -200
    
    
    -100
    
    
    -
    
    
    +100
    
    
    +200
    
    
    +300(Dollars in Thousands)Market value gain (loss) in assets
    
    $
    36,234
    
    
    $
    26,740
    
    
    $
    14,946
    
    
    
    
    
    
    $
    (17,514
    )
    
    $
    (36,608
    )
    
    $
    (56,470
    )Market value gain (loss) of liabilities
    
    
    (23,606
    )
    
    
    (16,199
    )
    
    
    (8,212
    )
    
    
    
    
    
    
    8,269
    
    
    
    16,658
    
    
    
    25,185Market value gain (loss) of net assets
before interest rate contracts
    
    
    12,628
    
    
    
    10,541
    
    
    
    6,734
    
    
    
    
    
    
    
    (9,245
    )
    
    
    (19,950
    )
    
    
    (31,285
    )Market value gain (loss) of interest
rate contracts before tax
    
    
    (12,788
    )
    
    
    (8,284
    )
    
    
    (4,029
    )
    
    
    
    
    
    
    3,813
    
    
    
    7,428
    
    
    
    10,859Total change in MVPE (2)
    
    $
    (160
    )
    
    $
    2,257
    
    
    $
    2,705
    
    
    
    
    
    
    $
    (5,432
    )
    
    $
    (12,522
    )
    
    $
    (20,426
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -0.17
    %
    
    
    2.45
    %
    
    
    2.94
    %
    
    
    
    
    
    
    -5.90
    %
    
    
    -13.60
    %
    
    
    -22.18
    %MVPE post shock ratio (3)
    
    
    -0.27
    %
    
    
    0.01
    %
    
    
    0.13
    %
    
    
    
    
    
    
    -0.36
    %
    
    
    -0.88
    %
    
    
    -1.48
    %
 
 (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on the Companys pre-tax tangible MVPE of $92.1 million at March 31, 2006.(3)
    
    Pre-tax tangible MVPE as a percentage of tangible assets.  
 Item 4: Controls and Procedures
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##### Table of Contents



PART
II OTHER INFORMATION
 
 Item 1:
  
 Item 1A.
  
 Item 2:
  
 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 Financial Officer filed herewith.32
    
    Section 906 Certification by Chief Executive Officer and Chief Financial
Officer furnished herewith.
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##### Table of Contents



SIGNATURES
  HARRINGTON WEST FINANCIAL GROUP, INC.Date: May 11, 2006
    
    By: /S/ CRAIG J. CERNY

Craig J. Cerny, Chief Executive Officer(Principal Executive Officer)By: /S/ WILLIAM W. PHILLIPS

William W. Phillips,President, Chief Operating Officer andChief Financial Officer(Principal Financial andAccounting Officer)
 - 31 -