##### 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 September 30, 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 (Unaudited)
    
    
    2Condensed Consolidated Statements of Financial Condition as of
September 30, 2006 and December 31, 2005
    
    
    2Condensed Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Shareholders Equity and Comprehensive
Income for the Nine Months Ended September 30, 2006
and Year Ended December 31, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4.Controls and Procedures
    
    
    27Part II  Other InformationItem 1.Legal Proceedings
    
    
    28Item 1A.Risk Factors
    
    
    28Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3.Defaults upon Senior Securities
    
    
    28Item 4.Submission of Matters to a Vote of Security Holders
    
    
    28Item 5.Other Information
    
    
    28Item 6.Exhibits
    
    
    28Signatures
    
    
    29EXHIBIT 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)
 September 30, 2006
    
    
    December 31, 2005ASSETSCash and cash equivalents
    
    $
    16,181
    
    
    $
    19,312Trading account assets
    
    
    850
    
    
    
    975Securities available-for-sale
    
    
    320,590
    
    
    
    387,352Securities held to maturity
    
    
    72
    
    
    
    80Loans receivable, (net of allowance for loan losses of $5,845
and $5,661 at September 30, 2006 and December 31,
2005, respectively)
    
    
    743,299
    
    
    
    672,890Accrued interest receivable
    
    
    4,901
    
    
    
    4,463Real estate owned
    
    
    11,071
    
    
    
    Premises and equipment, net
    
    
    14,400
    
    
    
    10,276Prepaid expenses and other assets
    
    
    4,041
    
    
    
    3,783Investment in FHLB stock, at cost
    
    
    14,409
    
    
    
    16,364Income tax receivable
    
    
    936
    
    
    
    251Bank owned life insurance (BOLI)
    
    
    18,251
    
    
    
    17,621Deferred tax asset
    
    
    706
    
    
    
    137Goodwill
    
    
    5,496
    
    
    
    5,496Core deposit intangible, net
    
    
    998
    
    
    
    1,187TOTAL ASSETS
    
    $
    1,146,201
    
    
    $
    1,140,187LIABILITIES & STOCKHOLDERS EQUITYDeposits:Interest bearing
    
    $
    654,342
    
    
    $
    619,213Non-interest bearing
    
    
    54,117
    
    
    
    49,932Total Deposits
    
    
    708,459
    
    
    
    669,145FHLB advances
    
    
    279,000
    
    
    
    319,000Securities sold under repurchase agreements
    
    
    59,888
    
    
    
    59,013Subordinated debt
    
    
    25,774
    
    
    
    25,774Due to broker
    
    
    486
    
    
    
    2,474Accrued interest payable and other liabilities
    
    
    4,461
    
    
    
    5,207Income tax payable
    
    
    525
    
    
    
    Deferred income taxes
    
    
    1,753
    
    
    
    TOTAL LIABILITIES
    
    
    1,080,346
    
    
    
    1,080,613STOCKHOLDERS EQUITYPreferred stock, $.01 par value: 1,200,000
shares authorized: none issued and outstandingCommon stock, $.01 par value;
10,800,000 shares authorized: 5,449,593 shares issued
and outstanding as of September
30, 2006 and 5,384,843 shares issued and outstanding
December 31, 2005
    
    
    54
    
    
    
    54Additional paid-in capital
    
    
    32,952
    
    
    
    32,059Retained earnings
    
    
    33,693
    
    
    
    29,458Accumulated other comprehensive loss
    
    
    (844
    )
    
    
    (1,997
    )Total Stockholders Equity
    
    
    65,855
    
    
    
    59,574TOTAL LIABILITIES & STOCKHOLDERS EQUITY
    
    $
    1,146,201
    
    
    $
    1,140,187
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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
 Dollars in thousands, except share data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005INTEREST INCOMEInterest on loans
    
    $
    14,317
    
    
    $
    11,122
    
    
    $
    40,256
    
    
    $
    31,628Interest and dividends on securities
    
    
    4,661
    
    
    
    4,725
    
    
    
    14,590
    
    
    
    13,690Total interest income
    
    
    18,978
    
    
    
    15,847
    
    
    
    54,846
    
    
    
    45,318INTEREST EXPENSEInterest on deposits
    
    
    6,866
    
    
    
    4,230
    
    
    
    18,232
    
    
    
    10,815Interest on FHLB advances and other borrowings
    
    
    4,409
    
    
    
    4,055
    
    
    
    13,410
    
    
    
    11,897Total interest expense
    
    
    11,275
    
    
    
    8,285
    
    
    
    31,642
    
    
    
    22,712NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES
    
    
    7,703
    
    
    
    7,562
    
    
    
    23,204
    
    
    
    22,606PROVISION FOR LOAN LOSSES
    
    
    200
    
    
    
    0
    
    
    
    490
    
    
    
    350NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    7,503
    
    
    
    7,562
    
    
    
    22,714
    
    
    
    22,256OTHER INCOME (LOSS)Net gain (loss) on sale of available-for-sale securities
    
    
    0
    
    
    
    275
    
    
    
    (613
    )
    
    
    783Income from trading assets
    
    
    150
    
    
    
    (186
    )
    
    
    983
    
    
    
    89Other (loss)
    
    
    (26
    )
    
    
    (7
    )
    
    
    (28
    )
    
    
    (13
    )Banking fee and other income
    
    
    931
    
    
    
    1,159
    
    
    
    3,038
    
    
    
    2,991Total other income
    
    
    1,055
    
    
    
    1,241
    
    
    
    3,380
    
    
    
    3,850OTHER EXPENSESSalaries & employee benefits
    
    
    3,104
    
    
    
    2,844
    
    
    
    9,166
    
    
    
    8,270Premises & equipment
    
    
    960
    
    
    
    969
    
    
    
    2,772
    
    
    
    2,867Insurance premiums
    
    
    104
    
    
    
    127
    
    
    
    324
    
    
    
    378Marketing
    
    
    122
    
    
    
    129
    
    
    
    336
    
    
    
    301Computer services
    
    
    213
    
    
    
    203
    
    
    
    610
    
    
    
    573Consulting fees
    
    
    199
    
    
    
    281
    
    
    
    759
    
    
    
    994Office expenses & supplies
    
    
    231
    
    
    
    201
    
    
    
    684
    
    
    
    642Other
    
    
    610
    
    
    
    625
    
    
    
    1,836
    
    
    
    1,702Total other expenses
    
    
    5,543
    
    
    
    5,379
    
    
    
    16,487
    
    
    
    15,727INCOME BEFORE INCOME TAXES
    
    
    3,015
    
    
    
    3,424
    
    
    
    9,607
    
    
    
    10,379INCOME TAXES
    
    
    913
    
    
    
    1,326
    
    
    
    3,332
    
    
    
    4,095NET INCOME
    
    $
    2,102
    
    
    $
    2,098
    
    
    $
    6,275
    
    
    $
    6,284TOTAL COMPREHENSIVE INCOME
    
    $
    1,718
    
    
    $
    2,786
    
    
    $
    7,428
    
    
    $
    6,691BASIC EARNINGS PER SHARE
    
    $
    0.39
    
    
    $
    0.39
    
    
    $
    1.15
    
    
    $
    1.18DILUTED EARNINGS PER SHARE
    
    $
    0.38
    
    
    $
    0.37
    
    
    $
    1.13
    
    
    $
    1.12BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,448,820
    
    
    
    5,364,077
    
    
    
    5,435,238
    
    
    
    5,338,935DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,585,527
    
    
    
    5,649,134
    
    
    
    5,563,214
    
    
    
    5,626,599
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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
    
    
    Loss
    
    
    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 in 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,275
    
    
    $
    6,275
    
    
    
    
    
    
    
    6,275Other comprehensive income,
net of taxUnrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    839
    
    
    
    839
    
    
    
    839Effective portion in change in
fair value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314
    
    
    
    314
    
    
    
    314Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,428Stock options exercised, including
tax benefit of $197
    
    
    64,750
    
    
    
    
    
    
    
    558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    558Stock options expensed
    
    
    
    
    
    
    
    
    
    
    335
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,040
    )
    
    
    
    
    
    
    
    
    
    
    (2,040
    )Balance, September 30, 2006
    
    
    5,449,593
    
    
    $
    54
    
    
    $
    32,952
    
    
    $
    33,693
    
    
    
    
    
    
    ($
    844
    )
    
    $
    65,855
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HARRINGTON WEST FINANCIAL GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 (Dollars in thousands)
 Nine months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    6,275
    
    
    $
    6,284Adjustments to reconcile net income
to net cash provided by operating activities:Accretion of deferred loan fees and costs
    
    
    (390
    )
    
    
    446Depreciation and amortization
    
    
    1,070
    
    
    
    1,064Amortization of premiums and discounts on loans
receivable and securities
    
    
    1,609
    
    
    
    1,976Provision for loan losses
    
    
    490
    
    
    
    350Loss (gain) on sale of investment securities
    
    
    613
    
    
    
    (783
    )Activity in securities held for trading
    
    
    125
    
    
    
    501FHLB stock dividend
    
    
    (602
    )
    
    
    (485
    )(Increase) in accrued interest receivable
    
    
    (438
    )
    
    
    (649
    )Decrease in income taxes receivable
    
    
    37
    
    
    
    464Stock Options expensed
    
    
    335
    
    
    
    Tax benefit on exercise of stock options
    
    
    (197
    )
    
    
    Provision for deferred income taxes
    
    
    1,392
    
    
    
    (781
    )(Increase) in prepaid expenses and other assets
    
    
    (2,148
    )
    
    
    (1,513
    )(Decrease) in accounts payable, accrued expenses,
and other liabilities
    
    
    (2,442
    )
    
    
    (1,007
    )Net cash provided by operating activities
    
    
    5,729
    
    
    
    5,867CASH FLOWS FROM INVESTING ACTIVITIES:Net (increase) in loans receivable
    
    
    (71,590
    )
    
    
    (53,739
    )Proceeds from sales of securities available for sale
    
    
    44,327
    
    
    
    48,881Principal paydowns on securities available for sale
    
    
    67,497
    
    
    
    59,917Principal paydowns on securities held to maturity
    
    
    9
    
    
    
    10Purchases of securities available for sale
    
    
    (45,333
    )
    
    
    (63,728
    )Purchase of premises and equipment
    
    
    (5,034
    )
    
    
    (1,379
    )Purchase bank owned life insurance
    
    
    
    
    
    
    (17,000
    )Acquisition, net of cash acquired
    
    
    
    
    
    
    (1,954
    )Sale (purchase) of FHLB Stock
    
    
    2,557
    
    
    
    (717
    )Net cash used in investing activities
    
    
    (7,567
    )
    
    
    (29,709
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    39,314
    
    
    
    73,569(Decrease) increase in securities sold under agreements to repurchase
    
    
    875
    
    
    
    (20,523
    )(Decrease) in FHLB advances
    
    
    (40,000
    )
    
    
    (23,000
    )Proceeds from exercise of stock options
    
    
    558
    
    
    
    715Dividends paid on common stock
    
    
    (2,040
    )
    
    
    (1,843
    )Net cash (used in) provided by financing activities
    
    
    (1,293
    )
    
    
    28,918NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (3,131
    )
    
    
    5,076CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    19,312
    
    
    
    13,238CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    16,181
    
    
    $
    18,314SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for:Interest
    
    $
    32,053
    
    
    $
    21,146Income Taxes
    
    $
    2,904
    
    
    $
    2,562
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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 
 - 7 -




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##### Table of Contents




    
    the 2005 Plan authorizes the granting of:
 
 
    
    vesting restrictions on awards may be time based and/or performance based;
    
    participation in the 2005 Plan is limited to officers at the level of Vice
President or above and other employees who provide substantial services to the
Company as well as the Companys directors;
    
    the 2005 Plan provides for a maximum of a floating ten percent (10%) of the
Companys issued and outstanding shares of common stock that may be delivered for
awards subject to adjustment as set forth therein; and
    
    the maximum number of Incentive Stock Options (ISO) that may be issued under the
Plan is the lesser of 1,000,000 or the maximum number of shares allocated to the
Plan;
    
    the right to acquire stock may not remain outstanding more than 10 years after
the grant date, and any ISO Award granted to any eligible employee owning more than
10% of the Companys stock must be granted at 110% of the fair market value of the
stock. Awards do not vest or become exercisable until six months after the date of
grant.
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Stock Based CompensationThree Months
    
    
    Nine MonthsSeptember 30, 2005
    
    
    September 30, 2005Pro Forma ResultsNet Income:As reported
    
    $
    2,098
    
    
    $
    6,284Total stock-based employee
expense under the fair value
based awards, net of related
tax effects
    
    
    59
    
    
    
    175Pro forma net income (APB 25)
    
    $
    2,039
    
    
    $
    6,109Earnings per share  basic:As reported
    
    $
    0.39
    
    
    $
    1.18Pro forma
    
    $
    0.38
    
    
    $
    1.14Earnings per share  diluted:As reported
    
    $
    0.37
    
    
    $
    1.12Pro forma
    
    $
    0.36
    
    
    $
    1.09
  2006
    
    2005Risk free interest rate:
    
    
    4.98
    %
    
    
    4.31
    %Expected option term (years):
    
    
    6.93
    
    
    
    9.00Expected stock price volatility:
    
    
    52.79
    %
    
    
    41.12
    %Contractual lives
    
    
    10
    
    
    
    10Dividend yield
    
    
    3.11
    %
    
    
    2.49
    %Weighted average fair value of options granted
    
    $
    7.08
    
    
    $
    8.16
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September 30,2006Weighted-Average
    
    
    AggregateExercise
    
    
    Intrinsic($ in Thousands Except Per Share Information)
    
    Shares
    
    
    Price
    
    
    ValueIncentive stock options:Outstanding beginning of year
    
    
    620,440
    
    
    $
    9.60Granted
    
    
    102,500
    
    
    $
    16.80Expired unexercised
    
    
    (1,000
    )
    
    $
    16.88Options exercised
    
    
    (64,750
    )
    
    $
    5.57Outstanding, end of the period
    
    
    657,190
    
    
    $
    11.11
    
    
    $
    3,662Exercisable, end of the period
    
    
    426,026
    
    
    $
    8.35
    
    
    $
    3,452
 Recent Accounting Pronouncements
 Fair Value Measurements,
 Considering the Effects of Prior Year Misstatements when Quantifying
Current Year Misstatements.
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109, Accounting for Income Taxes.
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2. EARNINGS PER SHARE
  Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-Share(net income amounts in thousands)
    
    (Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    2,102
    
    
    
    5,448,820
    
    
    $
    0.39
    
    
    $
    6,275
    
    
    
    5,435,238
    
    
    $
    1.15Effect of dilutive
stock options
    
    
    
    
    
    
    136,707
    
    
    
    (0.01
    )
    
    
    
    
    
    
    127,976
    
    
    
    (0.02
    )Diluted EPS
    
    $
    2,102
    
    
    
    5,585,527
    
    
    $
    0.38
    
    
    $
    6,275
    
    
    
    5,563,214
    
    
    $
    1.13
 Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    2,098
    
    
    
    5,364,077
    
    
    $
    0.39
    
    
    $
    6,284
    
    
    
    5,338,935
    
    
    $
    1.18Effect of dilutive
stock options
    
    
    
    
    
    
    285,057
    
    
    
    (0.02
    )
    
    
    
    
    
    
    287,664
    
    
    
    (0.06
    )Diluted EPS
    
    $
    2,098
    
    
    
    5,649,134
    
    
    $
    0.37
    
    
    $
    6,284
    
    
    
    5,626,599
    
    
    $
    1.12
 
 Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Corporate Profile
  Mission and Philosophy
  Multiple Market Strategy
  - 12 -




---



##### Table of Contents



1.
    
    Diversify its 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.
   Product Line Diversification
  Modern Financial and Investment Management Skills
  - 13 -




---



##### Table of Contents



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 of credit.3.
    
    Growing our non-interest bearing consumer and commercial deposits and
continuing to change the overall deposit mix toward core deposit accounts.4.
    
    Diversifying and increasing our banking fee income through existing and new
sources such as our overdraft protection program and other deposit fees, loan fee
income from mortgage banking and prepayment penalties, Harrington Wealth Management
trust and investment fees, and other retail banking fees.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% to 1.25% per
annum.6.
    
    Controlling interest rate risk of the institution to a lower level and seeking
high credit quality of the loan and investment portfolios.
  - 14 -




---



##### Table of Contents



Results of Operations
    - 15 -




---



##### Table of Contents



Three months ended
    
    
    Three months endedSeptember 30, 2006
    
    
    September 30, 2005(In thousands)
    
    Balance
    
    
    Income
    
    
    Rate (6)
    
    
    Balance
    
    
    Income
    
    
    Rate (6)Interest earning assets:Loans receivable (1)
    
    $
    730,840
    
    
    $
    14,317
    
    
    
    7.82
    %
    
    $
    641,446
    
    
    $
    11,122
    
    
    
    6.94
    %FHLB stock
    
    
    14,806
    
    
    
    205
    
    
    
    5.49
    %
    
    
    16,502
    
    
    
    180
    
    
    
    4.36
    %Securities and trading account assets (2)
    
    
    329,143
    
    
    
    4,384
    
    
    
    5.33
    %
    
    
    399,818
    
    
    
    4,500
    
    
    
    4.50
    %Cash and cash equivalents (3)
    
    
    10,469
    
    
    
    72
    
    
    
    2.73
    %
    
    
    9,802
    
    
    
    45
    
    
    
    1.84
    %Total interest earning assets
    
    
    1,085,258
    
    
    
    18,978
    
    
    
    6.98
    %
    
    
    1,067,568
    
    
    
    15,847
    
    
    
    5.94
    %Non-interest-earning assets
    
    
    50,544
    
    
    
    
    
    
    
    
    
    
    
    45,714Total assets
    
    $
    1,135,802
    
    
    
    
    
    
    
    
    
    
    $
    1,113,282Interest bearing liabilities:Deposits:NOW and money market accounts
    
    $
    89,650
    
    
    $
    506
    
    
    
    2.24
    %
    
    $
    123,596
    
    
    $
    543
    
    
    
    1.76
    %Passbook accounts and certificates of
deposit
    
    
    567,142
    
    
    
    6,360
    
    
    
    4.45
    %
    
    
    491,668
    
    
    
    3,687
    
    
    
    3.00
    %Total deposits
    
    
    656,792
    
    
    
    6,866
    
    
    
    4.15
    %
    
    
    615,264
    
    
    
    4,230
    
    
    
    2.75
    %FHLB advances (4)
    
    
    274,185
    
    
    
    3,425
    
    
    
    4.96
    %
    
    
    301,848
    
    
    
    3,197
    
    
    
    4.24
    %Reverse repurchase agreements
    
    
    59,439
    
    
    
    447
    
    
    
    2.94
    %
    
    
    60,023
    
    
    
    451
    
    
    
    3.01
    %Other borrowings (5)
    
    
    25,774
    
    
    
    537
    
    
    
    8.15
    %
    
    
    25,774
    
    
    
    407
    
    
    
    6.32
    %Total interest-bearing liabilities
    
    
    1,016,190
    
    
    
    11,275
    
    
    
    4.38
    %
    
    
    1,002,909
    
    
    
    8,285
    
    
    
    3.30
    %Non-interest-bearing deposits
    
    
    47,852
    
    
    
    
    
    
    
    
    
    
    
    47,523Non-interest-bearing liabilities
    
    
    6,658
    
    
    
    
    
    
    
    
    
    
    
    6,848Total liabilities
    
    
    1,070,700
    
    
    
    
    
    
    
    
    
    
    
    1,057,280Stockholders equity
    
    
    65,102
    
    
    
    
    
    
    
    
    
    
    
    56,002Total liabilities and stockholders equity
    
    $
    1,135,802
    
    
    
    
    
    
    
    
    
    
    $
    1,113,282Net interest-earning assets (liabilities)
    
    $
    69,068
    
    
    
    
    
    
    
    
    
    
    $
    64,659Net interest income/interest rate spread
    
    
    
    
    
    $
    7,703
    
    
    
    2.60
    %
    
    
    
    
    
    $
    7,562
    
    
    
    2.64
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.88
    %
    
    
    
    
    
    
    
    
    
    
    2.83
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.80
    %
    
    
    
    
    
    
    
    
    
    
    106.45
    %
 
 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. adjustments to fair value, which are included in
other assets.3)
    
    Consists of cash and due from banks and Federal funds sold.4)
    
    Interest on FHLB advances is net of hedging costs. 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 other debt and a note payable under a revolving line of credit.6)
    
    Annualized. - 16 -




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##### Table of Contents



Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005(In thousands)
    
    Balance
    
    
    Income
    
    
    Rate (6)
    
    
    Balance
    
    
    Income
    
    
    Rate (6)Interest earning assets:Loans receivable (1)
    
    $
    704,447
    
    
    $
    40,256
    
    
    
    7.62
    %
    
    $
    628,943
    
    
    $
    31,628
    
    
    
    6.71
    %FHLB stock
    
    
    15,678
    
    
    
    607
    
    
    
    5.18
    %
    
    
    16,215
    
    
    
    516
    
    
    
    4.24
    %Securities and trading account assets (2)
    
    
    358,064
    
    
    
    13,790
    
    
    
    5.14
    %
    
    
    411,519
    
    
    
    13,058
    
    
    
    4.23
    %Cash and cash equivalents (3)
    
    
    11,107
    
    
    
    193
    
    
    
    2.32
    %
    
    
    9,363
    
    
    
    116
    
    
    
    1.65
    %Total interest earning assets
    
    
    1,089,296
    
    
    
    54,846
    
    
    
    6.72
    %
    
    
    1,066,040
    
    
    
    45,318
    
    
    
    5.67
    %Non-interest-earning assets
    
    
    48,773
    
    
    
    
    
    
    
    
    
    
    
    37,338Total assets
    
    $
    1,138,069
    
    
    
    
    
    
    
    
    
    
    $
    1,103,378Interest bearing liabilities:Deposits:NOW and money market accounts
    
    $
    100,103
    
    
    $
    1,603
    
    
    
    2.14
    %
    
    $
    119,729
    
    
    $
    1,383
    
    
    
    1.54
    %Passbook accounts and certificates of
deposit
    
    
    543,431
    
    
    
    16,629
    
    
    
    4.09
    %
    
    
    464,844
    
    
    
    9,432
    
    
    
    2.71
    %Total deposits
    
    
    643,534
    
    
    
    18,232
    
    
    
    3.79
    %
    
    
    584,573
    
    
    
    10,815
    
    
    
    2.47
    %FHLB advances (4)
    
    
    292,817
    
    
    
    10,587
    
    
    
    4.83
    %
    
    
    315,945
    
    
    
    9,290
    
    
    
    3.92
    %Reverse repurchase agreements
    
    
    59,220
    
    
    
    1,325
    
    
    
    2.95
    %
    
    
    73,382
    
    
    
    1,491
    
    
    
    2.71
    %Other borrowings (5)
    
    
    25,774
    
    
    
    1,498
    
    
    
    7.66
    %
    
    
    25,774
    
    
    
    1,116
    
    
    
    5.77
    %Total interest-bearing liabilities
    
    
    1,021,345
    
    
    
    31,642
    
    
    
    4.12
    %
    
    
    999,674
    
    
    
    22,712
    
    
    
    3.03
    %Non-interest-bearing deposits
    
    
    47,575
    
    
    
    
    
    
    
    
    
    
    
    40,559Non-interest-bearing liabilities
    
    
    5,938
    
    
    
    
    
    
    
    
    
    
    
    8,761Total liabilities
    
    
    1,074,858
    
    
    
    
    
    
    
    
    
    
    
    1,048,994Stockholders equity
    
    
    63,211
    
    
    
    
    
    
    
    
    
    
    
    54,384Total liabilities and stockholders equity
    
    $
    1,138,069
    
    
    
    
    
    
    
    
    
    
    $
    1,103,378Net interest-earning assets (liabilities)
    
    $
    67,951
    
    
    
    
    
    
    
    
    
    
    $
    66,366Net interest income/interest rate spread
    
    
    
    
    
    $
    23,204
    
    
    
    2.60
    %
    
    
    
    
    
    $
    22,606
    
    
    
    2.64
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.86
    %
    
    
    
    
    
    
    
    
    
    
    2.83
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.65
    %
    
    
    
    
    
    
    
    
    
    
    106.64
    %
 
 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 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 other debt and a note payable under a revolving line of credit.6)
    
    Annualized. - 17 -




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- 18 -




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##### Table of Contents



For the Quarter Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of period
    
    $
    5,614
    
    
    $
    5,576
    
    
    $
    5,661
    
    
    $
    5,228Charge-offs:Real Estate LoansSingle-family ResidentialMulti-family ResidentialCommercialCommercial & Industrial
    
    
    (13
    )
    
    
    
    
    
    
    (369
    )Consumer and Other Loans
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Total Charge-offs
    
    
    (13
    )
    
    
    0
    
    
    
    (370
    )
    
    
    (2
    )Recoveries:
    
    
    44
    
    
    
    0
    
    
    
    64
    
    
    
    0Net Recoveries (Charge-offs)
    
    
    31
    
    
    
    
    
    
    
    (306
    )Provision (credit) for Losses on Loans
    
    
    200
    
    
    
    0
    
    
    
    490
    
    
    
    350Balance at end of period
    
    $
    5,845
    
    
    $
    5,576
    
    
    $
    5,845
    
    
    $
    5,576Allowance for Loan Losses as a
percent of total loans outstanding
    
    
    0.78
    %
    
    
    0.85
    %
    
    
    0.78
    %
    
    
    0.85
    %Ratio of Net Charge-offs to Average
Loans outstanding
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.04
    %
    
    
    0.00
    %
   - 19 -




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##### Table of Contents



Banking Fee & Other Income
 September
    
    September
    
    %
    
    September
    
    September
    
    %Banking Fee Type
    
    2006 Quarter
    
    2005 Quarter
    
    Change
    
    2006 YTD
    
    2005 YTD
    
    ChangeMortgage Brokerage Fee, Prepayment
Penalties & Other Loan Fees
    
    $
    176
    
    
    $
    409
    
    
    
    -57.0
    %
    
    $
    551
    
    
    $
    1,040
    
    
    
    -47.0
    %Deposit, Other Retail Banking Fees &
Other Fee Income
    
    $
    356
    
    
    $
    334
    
    
    
    6.6
    %
    
    $
    1,302
    
    
    $
    967
    
    
    
    34.6
    %Harrington Wealth Management Fees
    
    $
    214
    
    
    $
    183
    
    
    
    16.9
    %
    
    $
    618
    
    
    $
    536
    
    
    
    15.3
    %BOLI Income, net
    
    $
    185
    
    
    $
    233
    
    
    
    -20.6
    %
    
    $
    567
    
    
    $
    448
    
    
    
    26.6
    %Total Banking Fee & Other Income
    
    $
    931
    
    
    $
    1,159
    
    
    
    -19.7
    %
    
    $
    3,038
    
    
    $
    2,991
    
    
    
    1.6
    %
   - 20 -




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##### Table of Contents



Financial Condition
     HWFG Net Loan Growth and Mix
 September 30, 2006
    
    December 31, 2005
    
    September 30, 2005% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofLoan Type
    
    Total
    
    Total
    
    Total
    
    Total
    
    Total
    
    TotalCommercial Real Estate
    
    $
    260.5
    
    
    
    34.7
    %
    
    $
    253.2
    
    
    
    37.2
    %
    
    $
    260.7
    
    
    
    39.6
    %Multi-family Real Estate
    
    
    78.7
    
    
    
    10.5
    %
    
    
    80.9
    
    
    
    11.9
    %
    
    
    76.0
    
    
    
    11.5
    %Construction (1)
    
    
    106.9
    
    
    
    14.2
    %
    
    
    70.9
    
    
    
    10.4
    %
    
    
    55.5
    
    
    
    8.4
    %Single-family Real Estate
    
    
    115.1
    
    
    
    15.3
    %
    
    
    115.9
    
    
    
    17.0
    %
    
    
    109.0
    
    
    
    16.5
    %Commercial and Industrial Loans
    
    
    112.1
    
    
    
    14.9
    %
    
    
    96.5
    
    
    
    14.2
    %
    
    
    94.3
    
    
    
    14.3
    %Land Acquisition and Development
    
    
    50.5
    
    
    
    6.7
    %
    
    
    36.1
    
    
    
    5.3
    %
    
    
    34.5
    
    
    
    5.2
    %Consumer Loans
    
    
    25.7
    
    
    
    3.4
    %
    
    
    26.7
    
    
    
    3.9
    %
    
    
    28.1
    
    
    
    4.3
    %Other Loans (2)
    
    
    2.2
    
    
    
    0.3
    %
    
    
    1.3
    
    
    
    0.1
    %
    
    
    1.3
    
    
    
    0.2
    %Total Gross Loans
    
    $
    751.7
    
    
    
    100.0
    %
    
    $
    681.5
    
    
    
    100.0
    %
    
    $
    659.4
    
    
    
    100.0
    %Allowance, Deferred Fees & Discounts/
Premiums
    
    
    (8.4
    )
    
    
    
    
    
    
    (8.6
    )
    
    
    
    
    
    
    (8.2
    )Net Loans Receivable
    
    $
    743.3
    
    
    
    
    
    
    $
    672.9
    
    
    
    
    
    
    $
    651.2
 
 (1)
    
    Includes loans secured by residential, land and commercial properties. At September
30, 2006, we had $56.0 million of construction loans secured by single-family residential
properties, $24.0 million secured by commercial properties, $22.2 million for land
development and $4.7 million secured by multi-family residential properties.(2)
    
    Includes loans collateralized by deposits and consumer line of credit loans.
  - 21 -




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##### Table of Contents



Amortized
    
    
    FairCost
    
    
    ValueSeptember 30, 2006Mortgage-backed securities  pass throughs
    
    $
    101,285
    
    
    $
    99,638Collateralized mortgage obligations
    
    
    65,870
    
    
    
    65,421Commercial mortgage-backed securities
    
    
    35,595
    
    
    
    35,284Asset-backed securities (underlying securities mortgages)
    
    
    116,576
    
    
    
    117,081Asset-backed securities
    
    
    3,149
    
    
    
    3,165$
    322,475
    
    
    $
    320,589
 Amortized
    
    
    FairCost
    
    
    ValueDecember 31, 2005Mortgage-backed securities  pass throughs
    
    $
    125,153
    
    
    $
    122,840Collateralized mortgage obligations
    
    
    80,470
    
    
    
    79,531Commercial mortgage-backed securities
    
    
    40,647
    
    
    
    40,179Asset-backed securities (underlying securities mortgages)
    
    
    141,086
    
    
    
    141,564Asset-backed securities
    
    
    3,335
    
    
    
    3,238$
    390,691
    
    
    $
    387,352
    - 22 -




---



##### Table of Contents



Liquidity and Capital Resources
 Liquidity.
    - 23 -




---



##### Table of Contents



Capital Resources.
  Asset and Liability Management
    - 24 -




---



##### Table of Contents



i.e.,
    Accounting for Derivative Instruments and Hedging
Activities,
  - 25 -




---



##### Table of Contents



Critical Accounting Policies
  Cautionary Statement Regarding Forward-Looking Statements.
    
 Item 3: Quantitative and Qualitative Disclosures about Market Risk
   - 26 -




---



##### Table of Contents



Change In Interest Rates (In Basis Points)-300
    
    -200
    
    -100
    
    Base
    
    +100
    
    +200
    
    +300Market value gain (loss) in assets
    
    $
    27,392
    
    
    $
    21,066
    
    
    $
    12,336
    
    
    
    
    
    
    $
    (15,204
    )
    
    $
    (32,172
    )
    
    $
    (49,997
    )Market value gain (loss) of liabilities
    
    
    (21,402
    )
    
    
    (14,773
    )
    
    
    (7,513
    )
    
    
    
    
    
    
    7,538
    
    
    
    15,104
    
    
    
    22,764Market value gain (loss) of net assets
before interest rate contracts
    
    
    5,990
    
    
    
    6,293
    
    
    
    4,823
    
    
    
    
    
    
    
    (7,666
    )
    
    
    (17,068
    )
    
    
    (27,233
    )Market value gain (loss) of interest
rate contracts
    
    
    (11,041
    )
    
    
    (7,160
    )
    
    
    (3,488
    )
    
    
    
    
    
    
    3,298
    
    
    
    6,424
    
    
    
    9,407Total change in MVPE (2)
    
    $
    (5,051
    )
    
    $
    (867
    )
    
    $
    1,335
    
    
    
    
    
    
    $
    (4,368
    )
    
    $
    (10,644
    )
    
    $
    (17,826
    )Change in MVPE as a percent of:MV of total assets of Bank
    
    
    -5.36
    %
    
    
    -0.92
    %
    
    
    1.42
    %
    
    
    
    
    
    
    -4.64
    %
    
    
    -11.31
    %
    
    
    -18.93
    %Total assets
of the Bank (3)
    
    
    -0.63
    %
    
    
    -0.23
    %
    
    
    0.03
    %
    
    
    
    
    
    
    -0.28
    %
    
    
    -0.72
    %
    
    
    -1.26
    %
 
 (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on the Companys pre-tax tangible MVPE of $94.1 million at September 30, 2006.(3)
    
    Pre-tax tangible MVPE as a percentage of tangible assets.  
 Item 4: Controls and Procedures
   - 27 -




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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.
 - 28 -




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##### Table of Contents



SIGNATURES
  HARRINGTON WEST FINANCIAL GROUP, INC.Date:  November 10, 2006
    By:
    /S/ CRAIG J. CERNYCraig J. Cerny, Chief Executive Officer(Principal Executive Officer)By:
    /S/ WILLIAM W. PHILLIPSWilliam W. Phillips,President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial and
Accounting Officer) - 29 -